Congratulations on another loss! Can you imagine that from the CEO or CFO at the monthly company meeting?
Well, OK, maybe not really in those words. It’ll be more like, “Congratulations on meeting top line revenue targets again!”
But since the focus in SaaS companies is always on top line growth and never on the growing red numbers at the bottom of the income statement, the headline has some truth in it.
As I have written before, I really question this business model as being sustainable. I know there are some companies that are getting on in years that are still surviving, but they only do that with continuing rounds of funding by VCs and other investors who believe in the top line “uber alles” growth strategy.
In addition is the nagging thought that VCs, who by nature support lots of losers to get a couple of big winners, will only play that game with your company for so long before they decide you are one of the losers.
When you look at income statements for big SaaS companies, you see large numbers under “Operating Expenses > Sales and Marketing”. Here’s an example from a well-known company I’ve been following for a couple of years, Hubspot (HUBS)(https://www.hubspot.com/) in their Sept 2016 10-Q:
Sales and marketing accounts for 64.2% of their operating loss, and loss from operations in total accounts for 98.4% of the total loss. But investors look at the gross profit increase from 2015 to 2016 and are happy that it is up 55%. And that even though “Net loss per share, basic and diluted” is shown as ($0.91)!
Later in the 10Q comes this, as a warning?
“We have focused on rapidly growing our business and plan to continue to make investments to help us address some of the challenges facing us to support this growth, such as demand for our platform by existing and new customers, significant competition from other providers of marketing software and related applications and rapid technological change in our industry.
We believe that these investments will result in an increase in our subscription revenue base. This will result in revenue increasing faster than the increase in sales and marketing, research and development and general and administrative expenses, exclusive of stock-based compensation, as we reach economies of scale. With this increased operating leverage, we expect our gross and operating margins to increase in the long term. However, we will incur losses in the short term. If we are unable to achieve our revenue growth objectives, including a high rate of renewals of our customer agreements, we may not be able to achieve profitability.” (Emphasis mine)
This is, however, a typical financial report from companies in this space. So far, I’ve only run across one such company that is shifting its focus to profitability and that is Cornerstone on Demand (CSOD). In his Q4 2016 earnings call transcript on Seeking Alpha (http://seekingalpha.com/article/4045582-cornerstone-ondemand-csod-q4-2016-results-earnings-call-transcript), CEO Adam Miller said this” I’m also very pleased to report that 2016 marked our first year of profitability…”
Hats off to Mr. Miller!