After the last blog post (Startups: Don’t compete on “nimble” and “cash burn.”) I got a lot of questions on how to look at these public companies with negative EBITDA or negative Net Income. Here are some ideas.
Dataset 1: Public Companies with Negative EBITDA
Some companies have a negative EBITDA, but massive revenue growth, and their short-term cash and cash equivalents can pay their current long-term and short-term debts many times over (example: MongoDB, Appian, Everspin, Hubspot, Varonis, Box, Atlassian, Snap, Nutanix, Pure, Splunk). Others have a negative EBITDA and good growth, and have greater short- and long-term liabilities than their current cash balances (examples: Autodesk, ViaSat, Zendesk). In the last twelve month, MongoDB grew their revenue by $76m; Atlassian added $269m new revenue; and Workday added $615m new revenue — equivalent to the total global IT Infrastructure Container market in 2016, to put that single-year growth into perspective for startups in emerging sectors.
Dataset 2: Public Companies with Negative Net Income
If “losing money” means spending or investing more in your growth and company than you earned through sales, then looking at Net Income is a good idea. It’s also good to look in that context at two additional numbers: the Free Cash Flow — operating cash and capital expenditures, OPEX and CAPEX — and the Quick Ratio (also known as “Acid Test Ratio”): Cash equivalents plus marketable securities plus accounts receivables, divided by current liabilities. The Quick Ratio tells you how the most liquid current assets (things that are cash or can be made to cash) cover current liabilities such as accounts payable, short- and long-term debt, and unearned revenues for services or products that have been pre-paid but will be delivered in the future.
- MongoDB reported a TTM Net Income of -$118m. Their TTM FCF was -$81m, but they also show $139m Cash and Cash Equivalents on their balance sheet. They can cover their liabilities 3.25x over.
- SailPoint reported a TTM Net Income of -$3m, but the “ITDA” of the EBITDA was almost $10m (resulting in a positive EBITDA margin, but a negative Net Income). They were also growing revenue by 46.62% and have a +$25m TTM FCF that they can invest into further growth. They can cover their liabilities 1.29x over.
- Atlassian could pay their current liabilities 4.11x over, and they reported $190.9m of Free Cash Flow for the TTM. Their reported Net Income was a whopping -$348m, and their reported EBITDA -$207m, of which the “DA” portion amounts to about -$75m. Their Debt-to-Equity ratio is 1.16, so their equity is highly leveraged with debt.
- Ribbon Communications reported a -$90.7m Net Income at -$29.5m Free Cash Flow and they only show about $36m of Cash and Cash Equivalents on their balance sheet. They can only pay 0.75x of their current liabilities, but their reported TTM revenue growth (coming out of the merger between Sonus and Genband) is almost 122%, and their Debt-to-Equity ratio is only 0.16.
- Splunk reported almost $140m of Free Cash Flow at a -$313m Net Income, -$264m EBITDA. Splunk is still growing revenue at almost 39%, they have $1.9bn Cash or Cash Equivalents on the balance sheet, and can currently pay their liabilities 3.68x over.
- Snap reported -$1.4bn Net Income at -$823m Free Cash Flow, with only $350m Cash and Cash Equivalents left on the balance sheet. They currently show almost no Debt, though, and they can pay their current liabilities 5.87x over, so there is room to leverage the equity for future adjustments and revenue growth (beyond the already reported TTM 52.68%).
Dataset 3: EV/Revenue Multiples of Public Companies with Negative Net Income
At what multiples are public companies trading that have a negative net income? It’s a mixed bag. I did add the Quick Ratio as well as my own
back-of-the-envelope calculation I call the “CashIndex-100” and “CashIndex-85“:
- Take last reported cash and cash equivalents; revenue; revenue growth; (negative) net income.
- Linear Forecast: Assuming exactly the same ratio of negative net income to revenue in the next years as well as the same revenue growth, how long could the company operate before their cash is depleted (and without taking any other actions)?
I found that a linear forecast is a conservative assumption for most public companies with negative net income. To adjust for a potential slowing in revenue growth, the CashIndex-85 assumes a year-over-year dampening of revenue growth by 15% — for example 100% growth in year one, then 85%, 72.25%, 61.41%, 52.20%, etc. When you keep the ratio of negative net income to revenue constant, a lower revenue growth implies less net income losses and thus a longer runway than the CashIndex-100.
Do not take the CashIndex number literally as the number of years a company can operate before running out of cash! (REALLY! DON’T!) I use the CashIndex only as an indicator for a relative assessment between several companies. A lower CashIndex than a peer indicates higher urgency to change spending behavior or raise more money. A higher CashIndex than a peer indicates the option to invest more in growth and business transformation activities.
Below are a few company examples called out for no specific reason other than that you might recognize their names.