Episode 68: Xero, TechnologyOne and Palantir Go Big, Netflix, Martha's Comeback and the Rule of 40
The guys discuss stunning performances by Xero and TechnologyOne, the strange rise of Palantir, switching costs, the death of linear TV, and why the Rule of 40 is so important for investors.
The Contrarians catchup
Adir took a Polestar Uber ride to record the podcast, where his seat was at 90 degrees, which is “great for posture but bad for my will to live”. Also, “I would say the guy didn't know a single thing about how to drive a car. That was the main problem, to be honest with you”.
Adam recommends a new Netflix documentary about Martha Stewart, the first self-made female billionaire in the US, titled “Martha”, explaining how she ended up in jail and how James Comey was involved in her downfall (but not her resurgence).
Adam also recommends “Mr. McMahon”, a Vince McMahon documentary also on Netflix.
Adam on the logistics behind the Jake Paul v Mike Tyson fight: “I think what this represents is this feels like the last rites of cable and free-to-air TV starting to be read. The only thing that Netflix didn't do was live sports. This is a business that almost can do no wrong. They've got the platform now and I can't see them being toppled for 30 or 40 years. This is a ridiculous level of scale they’ve built.”
The guys discuss the differences between Netflix and Yahoo! at their peaks and switching costs in the streaming industry.
Adir’s latest book recommendation (spotted during an encounter with Gai Waterhouse on a Virgin flight): “My Life as a Jew” by Michael Gawenda.
Catapult celebrates 10 years on the ASX
Adir was in Sydney to ring the ASX bell alongside Catapult’s founders (who missed the bell ringing because their flight was delayed).
Adir: “The rope that you use to ring it came off in my hand while I was ringing the bell. And I said to the guy, ‘I think you need to fix that rope’. It's a bit of a problem, isn't it? Somebody should probably get onto that, which means it's never going to be fixed. There’s no IPOs this year besides GYG, right? What are they doing at the ASX? This is the year to fix the bell.”
Adir: “I would say the single biggest thing that investors have been excited about is this metric that I came up with alongside the co-founder and CEO, which is, how much of your incremental revenue flows through to profit and free cash? That has become the most important metric. And so last year, Catapult had 43% of incremental revenue flow through to profitability, which is really good. And so this half we had 75% flow through which I think is on the, on the high end.”
The Rule of 40
The guys discuss the infamous Rule of 40, which was popularised in a 2015 article by Brad Feld, a venture capitalist, titled “The Rule of 40% for Healthy SaaS Companies”.
The Rule of 40 is a principle that states a software company’s combined revenue growth rate and profit margin should equal or exceed 40%. SaaS companies above 40% are generating profit at a sustainable rate, whereas companies below 40% may face cash flow or liquidity issues.
Brad Feld recommends the following journey:
Achieving product-market fit.
Following The T2D3 method - tripling your annual recurring revenue (ARR) in each of the first two years, and then doubling it each successive year for the next three years.
The Rule of 40
Adir: “It is actually a very good metric but let's just remember somebody made up a number. We have to be very cautious of the rule of round numbers, which means they're generally not true. And they make it up. But it is a good proxy for understanding how business is doing.”
TechnologyOne
TechnologyOne has hit a market cap of $10B after 11% growth, helping the company crack the ASX top 50. TechnologyOne is one of Australia’s largest enterprise SaaS businesses, with over 1300 corporations, governments, statutory authorities and education institutions using its software.
Adam: “This is a real business making real money.”
Adir: “If I was the CEO of this business, to me the most obvious play on this business is that the whole world is moving to platforms. This should just be the platform for local government. And I think that that is the direction they're heading in other stuff.”
Xero is the 21st largest company in Australia
Adir guessed it correctly (kind of).
Xero shares hit $173 this week, with a $26B valuation, and EBITDA increasing by 50%. CEO Sukhinder Singh Cassidy has done an incredible job focusing on profit growth and not just growth at all costs.
Adir: “To speak of their switching costs, you could say that Xero displaced MYOB as the encumbent in this field. And these types of tools do let you export your data, which reduces your switching costs. You look at Xero, they have a reasonable brand, but their scale is much weaker than competitors in the US, and they have no network benefits.”
Adir: “You know when I think it had potential to be a great business? When it was flying in Australia, eating market share, great margins, and it had a US business that was really promising. And now I look at it and the US does not look promising. I think it’s overvalued; very overvalued.”
Five other stories worth following:
Last week the Justice Department said Google should be forced to sell its Chrome browser after a judge ruled the business maintained an illegal search engine monopoly. The DOJ also left an Android spin-out on the table.
Zomato is hiring a chief of staff, but the initial posting came with a catch: no pay for the first year, and the new hire would have to pay Zomato $20K+. CEO Deepinder Goyal said the job would provide “10x” more learning experience than a management class. 18K+ people applied.
Adir likes staying in New York’s Meatpacking District. The neighbourhood, once home to 200+ slaughterhouses and packing plants, is now filled with upscale restaurants, galleries, and luxury apartment buildings, and the tenants of the neighbourhood’s last meat market have accepted a deal to move out.
Airbnb narrowly missed expectations when it reported earlier this month. Localised bans against short-term rentals have slashed sales in major markets (NYC short-term Airbnb listings fell 83% in the year through May). Now the platform is taking its anti-ban lobbying efforts to the public.
The countries at the COP29 climate summit in Baku struck a deal that would provide low-income countries impacted the most by climate change $300B annually starting in 2035. Twelve so-called rich countries, including the US, will provide the funds.