http://www.copyright link/technolog...ervice-companies-such-as-xero-20150601-ghcrid
by
Joshua Tanchel
Two interesting things happened one Friday last month.
As Australians slept, Amazon
announced its first quarter results for 2015. Net sales increased 15 per cent year on year (or 22 per cent once foreign exchange rates are accounted for) and cash flow climbed 47 per cent for the quarter. Its net loss for the quarter was $US57 million ($74 million).
A couple of hours later that same day,
Xero announced its full-year results. Customers were up 67 per cent year on year, subscription revenue was up 81 per cent and annualised revenues were up 71 per cent year on year. It reported a net loss of $NZ69.5 million ($64.4 million), a 96 per cent increase from a year ago.
At first glance, the results seemed on-par – fantastic growth countered by losses. Yet the reactions couldn't have been more different. On the Nasdaq Amazon shares sky-rocketed after hours, with a nearly 15 per cent growth, earning Amazon founder Jeff Bezos an estimated $US5billion on his shareholding
However, on the Australian and New Zealand stock exchanges, where Xero is dual-listed, shares fell more than 10 per cent for the cloud-accounting software company as shareholders reacted to both the reported loss, and the departure of global CFO Doug Jeffries.
Two online, global businesses growing at incredible pace, yet shareholders in three different countries reacted very differently to those results.
Valuing tech players
Much has been said about how local investors value public technology companies. We're yield hungry, dividend hungry and profit hungry. Amid that hunger, however, there's little talk of the business' long-term growth potential.
As anyone who has built a successful, global Software as a Service (SaaS) company will tell you, it's all about growth. Software businesses are, by their nature, highly scalable with high growth prospects. The software, made once, can be repeatedly sold to different customers, potentially across the globe, if it suits global purposes. It doesn't cost more to sell once made.
But the start-up costs of any software business are high. The investment required in research and development, hiring costs, and particularly client acquisition in a company's early days are vital to ensuring long-term success.
Focusing on generating a profit in a software company's early stages of seeking a global market would actually be an irresponsible strategy. That early stage may be in the first few months of a company's life or it may be the first decade.
What matters is that, while the target market has room for growth, the company should be focusing its time, effort and, importantly, any earnings on filling that gap.
To do otherwise is to ignore the long-term interests of shareholders.
Amazon approach
Amazon's founder Bezos has tackled the issue of short-term profitability for longer than most people.
In his first letter to shareholders when the company publicly listed in 1997, Bezos said: "We will continue to make investment decisions in light of long-term market leadership considerations rather than short-term profitability considerations or short-term Wall Street reactions."
That the letter has been reproduced with each year's results announcement – for a stock that had grown 28,500 per cent since its debut – shows the continued need to educate those investors seeking returns in all the wrong places.
There is nowhere that education on the technology sector is more needed than in Australia. The co-founders of Atlassian, the $3 billion software company born out of a $10,000 credit card debt in Sydney, have publicly stated any IPO will occur overseas, due mainly to the fact that local investors struggle to understand technology stocks.
It isn't a stretch to determine that other Australian technology success stories, from Campaign Monitor to Bigcommerce, SiteMinder and Envato, could look outside Australia for public investment. Even those software companies that generate profits, and significant ones at that, struggle to communicate how they should be measured.
We talk about Australia moving away from a resource-dependent economy, to an innovation or technology economy – but if we don't learn how to evaluate high-growth tech stocks in the right way, we are in danger of losing our best and brightest.
Instead of listing on the ASX they will most probably list on the Nasdaq or NYSE, where media, investors, and the public have more support to scale a high-growth technology company. The market in North America would never ask an early-stage SaaS company (that is well stocked with hundreds of millions in the war chest), to chase profits while they are growing 50 to 100 per cent year on year.
We should be celebrating the technology companies that are creating hundreds, sometimes thousands of jobs in Australia, not chastising them for not generating a short-term profit.
We need to focus on the right metrics for the right companies. For SaaS, particularly in the growth stage, it is revenue growth and cash burn, not profit.
One only needs to look at Salesforce.com, a company that is reportedly for sale. In just 16 years, it has built a market valuation of $US48 billion.
Yet the company has never turned a profit. Think Facebook, and others. Are profits really that important in the short term?
Joshua Tanchel is a partner at Deloitte Private.
