K2 goes Big :: Looking at the Numbers
[Editor’s Note: This is a guest post from our UK Delivery Director, David Brakoniecki. He and I have long shared a fascination with how companies in our BPM market report their numbers: revenue, profit, growth, customers. Here’s a cross-post of his analysis of K2’s surprising $100M capital raise… ]
Interesting news in the BPM technology space yesterday as K2 announced a $100m round of investment from Francisco Partners to fund growth.
From the official press release and the article on Techcrunch, several interesting data points emerge:
- 1.5 million users across 1,400 customers in 80 countries
- 430% growth in subscription revenue over a 4 year period
- Projects revenue of $75m in 2015
- Indicated a revenue range of $60m to $70m for 2014
- 45% of revenue comes from international sources
- 20% of Fortune 100 are K2 customers It’s not much but enough to have some fun with numbers.
A Maze of Growth Rates
There are a couple explicitly or implicitly mentioned in the Techcrunch article.
If last year’s revenue was in the $60m to $70m range and 2015 is expected to $75m then K2 is expecting growth in the 7% to 25% range. For the sake of simplicity, let’s use the midpoint and say they are expecting 15% growth this year.
That’s a good number but its pretty far short of the 430% growth number in the article for a couple of reasons. First, the 430% is a growth rate over 4 years but with the magic of algebra we can convert a 4 year growth rate into the compound average growth rate for each year. So, K2 grew subscription revenue at an average of 52% over the 4 years.
But, 15% is still pretty far short of the 52% annual growth rate implied by their 430% number. What’s going on?
So, the second thing that we need to understand is that these numbers are apples and oranges. 15% is the growth rate for the entire business. It’s all the revenue. The 430% 4-year growth rate is only for ‘subscription revenue’ so it represents only part of the K2′s product portfolio. I would guess they represent cloud subscriptions so are probably the newest and fastest growing part of the portfolio. They would also be growing from a small base 4 years ago. From that perspective, I’m surprised that the subscription growth rate isn’t higher.
Key Takeaway on Growth Rates: Ignore the 430% number in the Techcrunch article. K2 is probably growing about 15% per year from a solid revenue base and, frankly, that is really a pretty good result.
The Value of a Customer
Another good metric from the limited data available is how much money are they making per customer. We know that they have 1,400 customers and that they made between $60m and $70m in 2014.
If we take the midpoint of the revenue range, then they are making $46,429 in revenue per customer.
From the data its impossible to know if these customers are profitable but we can deduce a more nuanced story than that one number. With some Fortune 100 clients in that 1400, I think that we can safely speculate that K2 has minority of customers that are disproportionately delivering revenue to the business.
Let’s assume that top 100 customers deliver 50% of the revenue for K2. That would mean that these customers have an average annual transaction size of $325,000. That seems reasonable and maybe even conservative for a global enterprise software business.
That assumption would mean that the remaining 1,300 customers had an average transaction size of $25,000 each. Now, at that level, the actual profitability per customer starts to be a question.
This analysis is very simplistic as we don’t have real data to do anything particularly interesting but think about the same analysis of the long tail customers, the 1,300 in the bottom half, and remember it’s likely that there is license, support, cloud subscription, consulting services and training revenue all contributing to that number. Profitability will be very unevenly spread across them.
Key Takeaway on the Value of a Customer: K2 seems to have a strong customer base and an solid clientele. They have solid customer success stories on their website but profitability will unevenly distributed throughout that customer base.
Finding a way to be more successful with their existing customers could really be the secret to driving K2′s future growth but successfully cannibalizing your own revenue streams and moving up the value chain is a hard challenge.*
I wish them luck.