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July 27, 2000
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Saturation in the Upper Tier?
I was hoping someone else would take a crack at this, but I guess it's only fair that I have to do it, as I noticed the disparity in the first place.
OK, here is what we know:
Total revenues for 2Q00 (excluding OpenSite): $384.1 million
Total mid-market rev (26% of above): $99.9 million
Total upper-market rev (74%): $284.2 million
Average new customer transaction size: $512K
Here is what we estimate:
Average mid-market new customer transaction: 300K
This is the average transaction size of PVTL's direct deals. ONXS gives a total transaction size of $236K, commenting that it is so low (down from 1Q00) because of increased proportion of indirect deals. IACT's estimated average is around $40K, but 80% of their deals are indirect and obviously they are dealing generally with smaller companies. So for an upper-end mid-market deal, $300,000 seems to be in the ball park.
And, here is what we can figure out from all that.
So, if the average mid-market deal size is $300K, and we know the total mid-market revenue was $99.8 million, then we know how many mid-market customers there were: 333. And as we know the overall transaction size was $512K, and the transaction size for 26% of the revenue averaged $300K, mathematically we know that the transaction size for the remaining pool of $284 million revenue attributed to the upper market must be $682K. And, therefore, we can derive the number of upper market deals: 417.
Here's the kicker. Apply the same methodology to Q100 (using an estimated mid-market deal size of $275 as three of the four companies reported transaction size increases from 1Q00 to 2Q00 � all dollars in millions):
|Overall average deal||$0.475||$0.512|
|Mid-market average deal||$0.275||$0.300|
|Upper market revenue||$269.2||$284.2|
|Upper market avg. deal||$0.533||$0.682|
|Upper market deals||505||417|
There are a number of interesting points here.
First of all, while the mid-market share of total revenue doubled (as mentioned by Tom Siebel in the conference call) from 13% to 26%, the actual increase in dollars was even better: 148% increase. And number of deals increased 128%. Folks, these are not annual increases here, these are sequential quarterly increases. Talk about hypergrowth!
OTOH, the increase in upper market revenue was much less inspiring: 6%. We don't know the exact figures (because we don't know the mid-market share of revenues in 4Q99 and before) but this is obviously a decline in growth in the upper market revenues from prior quarters. We need to watch this number carefully in 3Q00.
Even more unsettling � check out the number of upper market deals � they actually declined from 1Q00 to 2Q00, and by a lot (17%)! That this decline occurred despite the stated policy of management to forego higher margins in favor of increased market share says a lot. Could it be a sign of saturation in the upper tier market? If this number falls again in 3Q00, we'll have some fundamental reconsideration to do.
During the conference call, someone asked a question about transaction size, and the CFO responded that while he didn't want to say that there is "bifurcation" happening, there are two countervailing trends affecting transaction size. On the one hand, the larger number of mid-market deals drives the average down, and on the other hand, the availability of an ever-broader palette of functionalities for customers to choose from among tends to result in upper-market deals including more products and more seats. And thus, bigger-money deals.
Well, the word bifurcation sounds just fine to me. Average transaction size for upper market deals increased 28% and is now more than double the size of the average mid-market deal. Presumably this should have a positive effect on margins � it has to be more efficient, one should think, to net $6.8 million dollars in seven deals than the same amount of money in ten deals. However, there was no 2Q00 improvement in the overall margins � perhaps the larger number of presumably less profitable mid-market deals wiped out the gains?
Brad Hessel (long IACT & SEBL)
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