Ok, I went back and tried to break this out. Increases in commission expense as a percentage of increase in ANRR isn’t consistent quarter to quarter.
We keep saying that up-front commission expenses are hiding the value of the company, so I wanted to know how those commission expenses are actually impacting quarterly income. Here is what I came up with for the 6 quarters since their IPO, trying to add back those commission expenses as if they didn’t exist:
2015 Q2:
Commission: ANRR up $5M, commission up $1.2M = 24%
$6M adjusted net income, $16.5M ANRR, 42% tax rate: $2.3M extra net income = $8.3M
58,369,083 weighted diluted shares outstanding = **$0.14 EPS**, $0.56 TTM
2015 Q1:
Commission: ANRR up $7.6M, commission up $2.6M = 34%
$6.7M adjusted net income, $20.2M ANRR, 42% tax rate: $4M extra net income = $10.7M
56,562,661 weighted diluted shares outstanding = **$0.19 EPS**, $0.50 TTM
2014 Q4:
Commission: ANRR up $6.3M, can’t find commission change. Assuming 30%.
$2.5M adjusted net income, $20.6M ANRR, 42% tax rate: $3.6M extra net income = $6.1M
51,857,309 weighted diluted shares outstanding = **$0.12 EPS**, $0.45 TTM
2014 Q3:
Commission: ANRR up $5.1M, commission up $1.6M = 31%
$2.7M adjusted net income, $14.9M ANRR, 39% tax rate: $2.8M extra net income = $5.6M
52,978,051 weighted diluted shares outstanding = **$0.11 EPS**
2014 Q2:
Commission: ANRR up $3.2M, commission up $0.9M = 28%
$2.1M adjusted net income, $11.5M ANRR, 43% tax rate: $1.8M extra net income = $3.9M
50,284,362 weighted diluted shares outstanding = **$0.08 EPS**
2014 Q1:
Commission: ANRR up $3M, commission up $1.2M = 40%
$1.6M adjusted net income, $12.6M ANRR, 42% tax rate: $5M extra net income = $6.6M
48,371,169 weighted diluted shares outstanding = **$0.14 EPS**
So if the company paid zero commissions, they would have reported something like $0.56 Adjusted TTM EPS for this latest quarter, which would give an Adjusted P/E of just over 60 at today’s price of $33.90 (and note that the company has since done a secondary, so shares outstanding will be quite higher next quarter). There aren’t enough quarters available for me to calculate YoY TTM EPS growth, but I don’t know how reliable it’d be anyway coming off small numbers (the normal adjusted TTM EPS growth comes out to a crazy 1550% because of that very issue). But total revenue growth is running at about 46% and ANRR YoY growth in total over the past 4 quarters ran at 33%. So I think 40% growth seems like a reasonable figure going forward.
If we go with 40% growth, we get a 1YPEG of 1.5 today after backing out commissions given the 60 P/E. Now obviously 1YPEG is backward looking, and I’m assuming 40% growth going forward, so it’s not really a fair calculation. But let’s look 1 year from now to figure out where we might stand: $0.56 x 1.4 = $0.78 TTM EPS, which at today’s price would give a P/E of 43, which would give a 1YPEG of 1.08. So it will take a whole additional year just to get to “fairly valued” on a 1YPEG basis, and that’s if the company paid zero commissions at all, which obviously isn’t realistic.
So while it’s true that upfront commissions do make the usual metrics look worse than they really are, the stock still looks quite expensive on a 1YPEG basis. Of course, that’s only one data point, and given the quality of the recurring cash flows one would expect to pay a little more. The question is how much more.
Am I looking at this right? Is my math right? I’d love to hear how others are thinking about this.
Neil