The science behind MYOB achieving its prospectus forecast
MYOB released its maiden full year results yesterday and I thought I’d do a quick review to see how it differs or aligns with my analysis from 6 months ago:
It is a perfect set of financial results. The variances against its prospectus forecasts in terms of Revenue, Operating Expenses, EBITDA, NPATA were amazingly narrow at 1%, 1%, 2% and 1% respectively.
In a world that is inherently random, and operating within a dynamic and highly competitive market, how did MYOB manage to achieve its prospectus forecasts so precisely and almost to the dollar?
Pricing power is the answer
I believe this is a classic case study in the power of having a price inelastic product.
As a follow-up to the work I’ve done to-date on MYOB, I’ve collated further samples of actual customer price increases (off various industry contacts and trawling through MYOB’s own community forums):
Don’t focus too much on the actual prices (as some of these prices are not like-for-like), but let’s focus on the gradient of these price curves. In the period between 2008 and 2011 the price increases were mostly in the single digits, but since 2011 (Bain acquired MYOB in August 2011) the increases have been in the double digits and sometimes up to 38.5%!
This reaffirms my belief that one of Bain’s key investment thesis was that MYOB’s legacy customer base is sticky, price inelastic and could absorb aggressive price increases – and hats off to them for executing very well on this.
Switching costs for accounting software is extremely high as accounting software is deeply entrenched and core to businesses but only a relatively small portion of their overall economics (i.e. as a busy small business owner, would you go through the process of migrating your accounting system, changing your processes and procedures, retraining your staff and possibly also change your accountant / bookkeeper to save $20 a month?). In addition, these are small customers with no bargaining power so as much as they vent about the price increases there’s not much they can do in reality (try increasing your price by 38.5% when you’re supplying Commonwealth Bank).
With this deep moat in place, it is then not too difficult to manage your Revenue to perfection. For example, to achieve revenue growth of X%, you simply need to increase your price by (X+Z)% (with Z% to compensate for customer attrition). You can then increase your revenue without ever having to win a single new customer or even while losing customers.
So this brings us to the next question, has MYOB been winning new customers during FY2015?
MYOB’s true user numbers?
So here’s where it is much more insightful to focus your attention on how a company presents its numbers rather than what the company presents.
The short answer is – I have no idea whether MYOB’s user numbers are increasing or decreasing – but I can deduct from the way the numbers are presented that MYOB may not like the story that their raw numbers are telling. We can start by looking at MYOB’s beautiful smooth user growth chart:
The narrative here is obviously that MYOB is achieving solid user growth with losses in legacy desktop users being more than offset by strong growth in SME online users. But hold on, what do these numbers actually mean?
“Paying Users” is defined very loosely as follows:
Paying users comprise all online users and those desktop users that make additional maintenance payments (including MYOB BankLink customers).
This is a really really broad definition and can potentially include even the c.30,000 payroll users added as part of the ACE Payroll and IMS acquisitions during FY2015 (and short of further information I suspect it does).
And what are SME online users? It’s not defined in the presentation. In fact these users were called cloud users in the last results announcement. Although there’s no explanation as to what warranted the change in nomenclature, I’m sure there’s a reason.
So here’s where grey areas may emerge – if you tried to subscribe for MYOB Cover (i.e. “maintenance payments” for legacy desktop users) today, you get the message below:
We know that MYOB AccountRight is a hybrid product that is supposedly both “online” and “desktop” (but is not a true cloud product). So do they now classify MYOB Cover renewals automatically as online users given they’ve thrown in “online access” free of charge? I simply don’t know.
Interestingly, for a company that at a strategic level is transitioning into a sexy SaaS style business model, there is no release of any SaaS metrics (e.g. customer lifetime value, customer acquisition cost etc) for its cloud product.
My strong suspicion is that MYOB’s raw user numbers don’t tell the right story – i.e. the capital markets simply won’t accept a “growth by price increase” narrative. Therefore, in order to produce numbers that does support the narrative that MYOB is a growth business successfully transitioning into the cloud while generating strong cashflow there needs to be a certain degree of “flexibility” so their numbers can be sliced and diced to support this narrative.
What does this all mean?
To be fair, MYOB is a fantastic highly cash generative company with a high quality moat and has in fact been well managed to delivered a high quality set of financial results. However, as an investor we need to apply second level thinking, look beyond the company narrative and understand how this perfect set of financial results have been achieved.
My fear is that the low hanging fruits in the form of price increases have now been largely picked clean – MYOB cannot continue to implement such aggressive price increases when AccountRight is now basically twice the price of equivalent offerings from the the likes of Xero and Intuit.
As a final thought, I understand MYOB increased its annual professional partner subscription fee by 30% during 2015 (in contrast, Xero and Intuit offer free professional partner memberships as they aggressively bring gatekeepers into their fold). Price increases flow directly and immediately to boost your current year earnings (certainly helps when you have prospectus forecasts to meet) but what are the longer term implications of this?
Will MYOB’s moat be as deep after FY2016?
Note: The above blog post constitutes the author’s personal views only and is not to be construed as investment advice. Being obviously passionate about the art of investing, the author may from time to time hold positions in the aforementioned stocks consistent with the views and opinions expressed in this blog post.