Friday, May 13, 2011

Tech Valuations: back to big $$$ per eyeballs! (hint: The ARPU isn't there)

According to my calculations in the table below, the best annualized ARPU (Average Revenue Per User) is still in the Telecom business. Though Telecom isn't as sexy as the "visionary potential" of Facebook, but at least it delivers real revenues with the data revenues portion of ARPU getting to around 10-15% now. And since Mobile is the name of the game for social networking and social gaming, Mobile Operators are going to always be in the mix.

So did AT&T overpay for T-Mobile? Not according to the table below. T-Mobile US  acquired by AT&T for $39B for 34M subscribers, that's a $1,147 valuation per subscriber, and these are PAYING subscribers. With 2010 revenues at $17B, Annual ARPU is $500 per subscriber (An average monthly bill of $42 per subscriber). So valuation comes to 2x ARPU.

Microsoft bought Skype for $8.5B for 124M users (source 2010 S-1 filing; not the 600M names in their database), that's a $68 valuation per user. Skype 2010 revenues were about $800M, so that is an annual ARPU of $6.45 (yes, that is 6 dollars and fifity cents!). Worse, out of the 124M only 8M users are subscribers and generate that $800M, so the "effective annual ARPU" is $100. So for the sake of comparison to the T-Mobile Deal, Microsoft paid a $1,062 per Skype subscriber (the 8M paying ones). So valuation comes to 10x ARPU. Or in "PR" terms, $69 per user on the basis of the 124M users, so that still comes to  11x, anyway you look at it.

Similarly, in its IPO, LinkedIn is valued at $3B with 100M users, that's a $30 valuation per user. LinkedIn 2010 revenues were about $200M. Granted in that revenue figure, subscriptions accounted for 25%, advertising for 30% and recruiting for 45%, the fact is the recruiting revenue and the advertising revenue is driven by the 100M users on the network. So it is fair to calculate an ARPU of $2 per user. So valuation comes to 15x ARPU.

Facebook valued at $67B with 600M users, that's $112 valuation per user. Facebook 2010 Revenues were $1.9B. So ARPU is $3. So valuation comes to 36x ARPU.

In the end, bankers, shareholders and acquisitive CEOs always find a way to justify the premium of the "strategic value". Though public shareholders - yes including those of AT&T, of cash-cow Microsoft and of soon-to-be-public LinkedIn, should really analyze the impact on market cap compared to other revenue, margin and cash.

Monday, May 2, 2011

Turnarounds: Why? Why? Why?

When I am retained to advise on the turnaround of a company, my only tool, after 20 years of experience, is the word "why". The magic of the word "why" never ceases to amaze me. I discover time and again how executives and their teams continuously take actions in a mindless manner, simply because it's been done like that in the past.

As soon as an outsider like me starts to constantly ask "why is this?", "why is that?", "why do we do it that way?", I start getting blank stares and angry responses. And that's what I want. It stimulates the brain, it energizes the thought process, it forces unconventional thinking. In brief, it takes everyone at the company out of their comfort zone. And isn't that why the company got in trouble in the first place? because everyone just got too comfortable and did not challenge themselves and each other.

Just like in real estate, "location, location, location" is the magic formula to a successful real estate strategy, in turnarounds, "why, why,why" is the magic formula. Sometimes the company goes from the brink of bankruptcy to being completely turned around simply because I ask "why, why,why". Most answers  lie within; executives and team members alike come up with solutions that have been in the back of their head for a long time. They simply did not bother putting them on the table because no one asked them, no one dared ask "why".

Sometimes problems are deeper and more urgent when I am asked to turnaround a company, and certain techniques are only learned with experience and battleground scars, but the "why" always solves at least 50% of the problem, even with outside suppliers and bankers. Sometime they don't even know what outcome they want out of a turnaround, but when asked "why", they start thinking about their actions.

So start asking "Why?"