Subject line: [Flawless Financials] Revenue per Headcount Flawless Financials the Financial Forecasting Online Newsletter from Minotaur Financial and David Brode March, 2003 Please pass on Flawless Financials to those in your network. To leave Flawless Financials, follow instructions at bottom. * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * This month: Revenue per Headcount * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * For the last ten years, I've focused on revenue per headcount (Rev/HC) to test how aggressively a company forecasts expenses. High Rev/HC tends to come in plans that over-estimate EBITDA margins. I like this metric because it's such a simple, easily understood ratio, and so tangible. Reported revenue is a pretty solid number, which is only manipulated by a few percent (Enron & Qwest notwithstanding) and headcount is very tangible, and not typically fudged. This newsletter focuses on what Rev/HC ranges are observable using public company data. First I'll report results and then discuss the methodology and tools used to create this analysis. The upper limits of Rev/HC can be seen in the Dow Industrials companies. The top four are Exxon Mobil ($2.1M), Merck ($663K), Microsoft ($610K), and J.P. Morgan ($573K). In 1998 Microsoft had Rev/HC of $1.3M, an astronomical result which they used to build up tens of billions of dollars in cash! That being said, not all the Dow companies function at this level. At the other extreme, McDonald's is at $39K, and Alcoa is next lowest at $160K. If you eliminate the two outliers of McDonald's and Exxon Mobil the median is $312K, and the average is $338K with a standard deviation of $139K. The median Rev/HC of the 200 largest S&P Industrials companies comes in at $312K, providing additional comfort that this range is a reasonable large-company average. Here's the average Rev/HC for a variety of industry groups: Amount ($ 000) Industry --------------- -------------------------------- 1,906 REIT – Office Bldg 1,088 Major Integrated Oil and Gas 741 Electric Utilities 337 Industrial Metals & Minerals 275 (Small) Communication Equipment 251 Application Software 227 (Small) Wireless Communications 195 (Small) Application Software 189 (Small) Business Software & Services The higher the capital investment, the higher the Rev/HC. This is clearly seen at the top of the chart, in real estate investment, oil exploration, production, refining, and distribution, mining, and electric utilities. Once we get into making technology products, be they hardware or software, the Rev/HC falls significantly. Hardware companies tend to have higher Rev/HC, as is reflected in the Communication Equipment sector. And all the software metrics show that even profitable companies struggle, on average, to exceed $250K per employee. Now this is solid observable public market data for successful companies: the small companies are all profitable and have revenues of $50-250M. Yet many software plans I see show Rev/HC of $350-600K by the out years when the company is in this revenue range. So I recommend my clients watch Rev/HC to ensure that enough headcount-related costs are baked into the plan. Until next month, all the best, David Brode – Minotaur Financial Helping Companies Create Better Financial Forecasts * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * How good is your financial model? I'm offering a limited number of free model reviews each month. To take advantage, email me your financial model (in Excel) and the PowerPoint deck. I'll follow up with a phone call where you'll get action steps which should provide significant value to the company. * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * http://www.brode.net mailto:David@Brode.net 1919 14th Street, Suite 510 Boulder, CO 80302 (303) 444-3300 * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * TOOLS AND METHODOLOGY Data for this article was gathered using the free MSN Deluxe Stock Screener (free download required) at http://moneycentral.msn.com/investor/finder/customstocks.asp The interface on this is very flexible and it cleanly downloads results into Excel. In general, the engine is quite fast. If anything, these numbers are overly favorable. In setting the screens, I took only profitable companies, based on 12- month operating profit from continuing operations. Presumably, unprofitable companies would have lower Rev/HC. To get a copy of the Excel spreadsheet with raw results, send mail to mailto:David@Brode.net. * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * (c) 2002 Minotaur Financial, All rights reserved. You are free to use material from the Flawless Financials newsletter in whole or in part, as long as you include complete attribution, including a live web site link. Please also notify me where the material will appear. The attribution should read: "By David Brode of Minotaur Financial. More articles on financial forecasting can be found at http://www.brode.net" * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * To find out more or see if I can help with your financial forecasts, call me to discuss your issues at no charge: (303) 444-3300. I'm very accessible and glad to help. * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * DO YOU LIKE THIS NEWSLETTER? You are welcome to share this email with colleagues who would benefit from better numbers. Your feedback is always welcome and appreciated. Write in to mailto:feedback@brode.net. * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * PRIVACY POLICY: I never rent, trade, or sell my email list to anyone for any reason whatsoever. You'll never get an unsolicited email from a stranger as a result of joining this list. To SUBSCRIBE FREE to this newsletter, send an email to mailto:subscribe@brode.net. And you'll get Minotaur's Financial Forecasting White Paper in the deal. To be REMOVED from this list, send an email to mailto:remove@brode.net. (Please note that this message needs to come from the email address that originally subscribed. If you need help determining this, please email mailto:David@Brode.net.)