About two years ago, I blogged about a company called EBIX, an insurance Industry Cloud provider whose financial numbers were unbelievable, yet whose market valuation was still reasonable, in part, because many observers figured the numbers were literally too good to be true.
(At the time, EBIX’s stock had run up to $20/share and stayed there until Goldman Sachs agreed to buy EBIX at about that price. It fell back to $11 in one day last June when Goldman dropped their planned acquisition due, in part, to a Federal prosecutor’s investigation of misconduct at the company. The company remains mired in controversy, including questions about their accounting.)
One of the problems with EBIX was that it did not report transparent underlying metrics, the way, say retailers, report “same store sales” on a monthly basis. Every business has its own underlying non-GAAP metrics that portend its future financial results. Certainly every Industry Cloud provider does. And yet, because these saas metrics are not regulated, and can include some creative accounting, a manager or investor needs to be pretty diligent in understanding these numbers.
My all-time favorite metric from a platform provider was from Ketera (now Rearden Commerce) in a press release dated October 25, 2005 :
“The number of registered Ketera customers rose above 5,500 new paying subscribers across the company′s full spend management solution suite, up nearly 50 percent on a year-over-year basis. More significantly, Ketera surpassed $3.2 trillion in annual spend processing.” (My emphasis added.) I was at Ariba at the time and I remember getting calls from analysts asking me why the spend through our network was so much smaller than Ketera’s, which was apparently 20% of US GDP!
If you are managing an Industry Cloud provider, or investing in one, insist that underlying economic metrics be clear, consistent, and meaningful. Beware of:
- Those bearing only percentages! Growth from $0 to $1 is infinite, It is all downhill from there. Percentages cannot be deposited in the bank.
- Total numbers of buyers and suppliers on an Industry Cloud platform. What you care about is active buyers and suppliers–in the last month and year. Cumulative data is not very valuable.
- Lack of numbers about the underlying commerce. Just because an Industry Cloud provider builds the platform, does not mean “they” (buyers and suppliers) will come and it certainly does not mean they will transact! At the end of the day, you need to know what it costs each type of participant on the network to be on the platform, relative to the commerce they conduct on the platform. Only this ratio will allow you to assess the value they receive.
- One-sided metrics. If the Industry Cloud is buyer and supplier-based, it is great to know how many suppliers each buyer has. But a platform really has a network effect if the number of buyers a supplier has on the platform is greater than 1 and growing!
- Averages. Well established networks start by following the Pareto rule, that 80% of the commerce is transacted by 20% of the participants. But you need to understand if it is more concentrated than that and how quickly the concentration is falling. Averages related to transactions are nice, but distribution curves are better.
As a manager, a team that does not know what its metric should be, or confuses the silly ones put out for press releases with the real ones necessary to run a business, is a huge red flag. As an investor in Industry Cloud providers, any time the metrics are not clear and consistent, I’m very suspicious.