Revenue Mixology – Q2 2021

 

Revenue Mixology
Q2 2021

~news to move the needle on media revenue diversification with a twist~
EXPERIENTIAL | SOCIAL | AUDIO | SUBSCRIPTIONS | AFFILIATE | MERCHANDISING

As media companies diversify their revenue base, executives and investors are grappling with how that diversification effects their value. Do the traditional valuation metrics fairly reflect the value of new business models being seen across the industry?

As we look at the market, we see investors becoming more savvy about the nature of recurring revenue models and the long-term predictability of their cash flows. A customer that will generate profitable revenue for many years into the future is a valuable asset. But traditional discounted cash flow valuations place too much emphasis on the expense of acquiring new customers rather than valuing the high-margin revenue they will create for many years to come. After all, if you can acquire new customers efficiently, then the best thing for long term shareholder value is to build your subscriber base as quickly as possible, not to maximize EBITDA today.

Traditionally the domain of venture capital, it now looks like the public markets, growth equity and M&A markets are recognizing the value of recurring revenue and valuing it appropriately. While far from perfect, a simple model that uses key operating metrics for recurring revenue companies as a shorthand for valuation is gaining traction.

Enterprise Value = Annual Recurring Revenue x Growth Rate x Net Revenue Retention x 10

When any of the three KPIs are higher or lower than industry norms, the valuation can be adjusted up or down accordingly. In general though, this simple model results in a valuation that is typically in the ballpark of public market valuations. 

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