Originally Posted by
KW
Actually it is not new at all. It is simply an old idea given a new name. SaaS companies used to be called ASPs - Application Service Providers. They have been around since the late 90's and the concept was an evolution of the dot.com model. I attended the last big industry Conference in Orlando, FL in May 2000, and the bulk of the exhibitors and attendees were at ASPCon rather than ISPCon. It was all the rage back then. In fact, it was my job to evaluate ASPs in terms of whether or not to become a channel partner for them. I have done this in both New Zealand, and Australia. So I am well acquainted with the whole model.
Today the SaaS business model is just as unproven as it was back in 2000. Those original ASPs ended up folding due to never making a profit, and ultimately running out of cash (due to the clanging shut of investors wallets due to the market crash. Oh wait, that won't happen again will it?). The only thing that changed is that there is a new bunch of investors and media people who were not around in 2000, who had never heard of ASPs, and thus think that SaaS is something brand new (well, I guess that's why the industry renamed it. Similar to how global warming is now called climate change).
Now having picked apart many commercial ASP/SaaS financials, I can tell you profitability comes down to the split between fixed and variable costs. If the vast proportion of costs are fixed, then the Saas model would work, as there ultimately would be a breakeven point where the customer revenues cover the costs. However, if the bulk of costs are variable (sales, commissions, and support are the biggies) then the only thing that happens is that the more customers the company acquires, the more money they lose. There is no breakeven point (but if you own the company who cares? You got stock and are worth millions. So long as you stick to the story you should be able to milk the market for years and retire comfortably).
This is why the important metric for XRO is not customer numbers or revenues. It is the accelerating rate of losses. If Saas was to work, more customers should see shrinking losses. So this suggests that XROs cost base is a variable one, not a fixed one. And until they reign in their costs (which they have no intention of doing) there will be no breakeven, and no profits.
And then there is churn. After acquisition, churn is the second most important thing to a SaaS company. XRO faces two risks - one is that their customer base is inherently unstable, 4 out of 5 small businesses fold within 2 years. Secondly, don't underestimate the intelligence of the customer. For those small businesses who make it, they may end up evaluating the Total Cost of Ownership of accounting software, and decide that for the long term they are better of buying the software outright (ie. desktop) and capitalising it, rather than paying a monthly fee forever and expensing it. If I ran a small business, this would certainly be one of the things I would be considering. Consequently, I would expect XRO to have a high churn rate (which makes it different to enterprise SaaS companies whose customers are more sticky). In this instance Intuit and MYOB would have a competitive advantage, as they can loss lead customers on to their online platform, and then shift them to desktop when it suits the customer to move.
You combine a high churn rate with customers leaving before you have reached the point where you are making a profit on them, with the high variable costs of acquiring them in the first place, and you have a recipe for escalating losses, and a company where the only shareholders who win are those who founded the company or bought in early. The rest are just grist for the mill.
Lastly, a bit of context. Last financial year, Intuit spent $1.2 BILLION dollars on sales and marketing alone (or 29% of revenue). Research and Development was $685 MILLION. How does XRO plan to compete with that?
Its nice that a little ole NZ company is pluckily trying to stick it to the giants, but I wouldnt be betting my retirement on their success. In the business world, he who has the most cash wins (the Microsoft and Facebook models). Get back to me when XRO is cash flow positive and profitable.