This is a company that was mentioned here a few days ago. There was a nice link that had an advertisement from the company and an interview with the founder. I can not find that link.
Anyway, I took an interest and gathered some data:
This is a New Zealand company that is creating a cloud based accounting system for small businesses. As it is in New Zealand, I don’t think Saul would invest in it. As it is not profitable yet, I do not think Saul would invest in it.
Their growth is amazing. Their operating revenue this year was over 70 million. Last year it was 38 million. That is growth of 83%.
One thing I really like about this company is that it runs on the razor and blade model. Once a company is subscribed, it is very unlikely that they will switch. So, going into next year, they have 284,000 paying customers. That is an 81% increase from March of 2013. They call this “subscription revenue,” and through March of this year, 69.916 million of 73.610 million of total operating revenue was from subscription.
They have 20 market penetration in New Zealand, and way less than 1% market in the United States. Their big push now is into the US market. If they could reach 20% of small businesses in the United States, their income would multiply by maybe a million times?
They achieved that market penetration in New Zealand because their system works and makes sense to small business owners.
There are three main expenses right now, and they explain why the company is losing money. They also make a strong argument that these costs will diminish as market share is established over the next two years. (Another reason that Saul would not invest in this company).
The first is staff or what they call “headcount.” This has actually gone down during this year: Cost of revenues has reduced to 35% of operating revenue from 36% in the previous period. While management has a range of work programs to lower cost of revenues substantially, 2014 represented a year of building capability – this investment will continue in 2015. We expect cost of revenues to continue to reduce as a percent of operating revenue, thereby increasing the gross margin.
The major costs for the year came from advertising and marketing: Sales and marketing expenses were $55.1m for the year ended 31 March 2014, $33.1m higher than in the previous period. These costs increased as a percent of operating revenue, reflecting the investment in recruiting senior management and filling out global teams, along with the implementation of additional marketing initiatives.
Employee numbers in the sales and marketing function increased by 75% during the period, resulting in increased personnel related costs of $14.9m (an increase of 134%). External sales and marketing costs, including the cost of advertising campaigns, online marketing, running Xerocon conferences and road shows increased by $10.7m during the period.
As sales and marketing costs are primarily focused on acquiring new customers, the efficiency of the sales and marketing spend is determined by comparing it to the revenue these customers will generate. A common measure is to calculate the sales and marketing cost to acquire each new customer and then calculate the number of months it will take to recover this cost based on the monthly ARPU, i.e. total sales and marketing costs divided by new customers divided by monthly ARPU.
This measure is referred to as “months to recover CAC (cost of acquiring customers)”. At a group level there was an increase in “months to recover CAC” in 2014. This increase was largely driven by the increased investment in Australia, United Kingdom and United States, where we are in the “recruit” and “educate” phase of our partner channel (accountants and bookkeepers) sales strategy. In New Zealand where we are in the “educate” and “grow” phase this sales and marketing measure improved, giving us confidence in the long term validity and efficiency of this approach.
Sales and marketing costs will increase in absolute dollar terms as investment toward growing global market share continues however we expect to see a significant reduction in “months to recover CAC” and in sales and marketing costs as a percent of operating revenue.
The third major expense for the company comes from their product development. This has remained at a consistent percent of their total operating revenue from last year.
The part of the company that is the most interesting to me is how they are growing. They have established themselves well in New Zealand very quickly. Now they are growing quickly in Australia. But, they are just beginning to enter the US market. If they grow in the same way in the US, this company will be truly exponential.
I think it is not a good pick by Saul’s standard, but I find them intriguing. I will keep them on a watch list.
Pink Sheets – XROLF current price is 27.85, and average daily volume is less than 2000 shares (another reason Saul wouldn’t buy this).