intelliHR is a Software-as-a-Service (SaaS) company, which is listed on the Australian Stock Exchange (ASX) under the ticker IHR (ASX:IHR).[tds_partial_locker tds_locker_id=”8545″]
Its Annual Recurring Revenue (ARR) has grown from approximately AUD1.549m to AUD2.8m in the last 12 months (83% Year on Year (YoY) growth) as at 26 November 2020. The company has achieved this growth while burning AUD904k last quarter (ending 30 September 2020) and AUD7.6m in the bank.
Also, the company’s current Net Promoter Score (NPS), which is a good indication of product market fit, is world class 74 when compared to global B2B SaaS companies.
I believe intelliHR’s SaaS based operational metrics put it in the 75th percentile when compared to global SaaS companies at its current stage (e.g. Sales and Marketing efficiency (Magic Number), Gross Profit Margin (GPM) and Annual Recurring Revenue (ARR) growth), NPS).
The reasons why I believe IntelliHR could become the next billion dollar ASX listed SaaS company, are as follows:
- Serially successful tech entrepreneur and investor Bevan Slattery invested recently through his family office.
- Its NPS is world class, which means it has the potential to execute on its publicly stated goal to Triple, Triple, Double, Double, Double (T2D3) and become a unicorn SaaS company (valuation > USD1bn).
- Product-led growth strategy that was adopted and refined since COVID (the introduction and client acquisition through a freemium model).
- A change to value based pricing that maps back to client value (Return on investment for the solution, e.g. a reduction in cost within company’s HR expenses).
- A Founder who consulted his way to product market fit (evidenced by the world class NPS score of 74).
- A horizontal b2b SaaS solution that is starting with smaller companies and moving its way up to larger companies while collecting data and using it to improve the value for clients.
- Focus on North America and global markets following reaching AUD2m in ARR (this is the usual base to T2D3).
The company is filling a gap in the HR market (AUD38bn TAM) with an effective Product Led Growth go-to-market strategy, value-based pricing, a world class Net Promoter Score (NPS) and establishing a sales and marketing presence in North America. These are the qualitative reasons why I think intelliHR is such a high quality fast growing SaaS company.
Also, IHR’s operational metrics are increasingly improving which means it has the potential to become better over time. The quantitative improvements (metrics) validate the qualitative aspects of the business model and market (summarised immediately above).
I think because of the reasons outlined above, intelliHR will begin to re-accelerate its ARR growth and scaling efficiency which it has already shown early signs of.
Further, intelliHR now has the foundation to meet its objective to triple, triple, double, double and double its recurring revenue (to become a billion dollar SaaS company).
In terms of IHR’s ARR growth, 83% Year on Year (YoY), it is quite a low growth rate for a company that currently has a 23x EV/ARR multiple at its Enterprise Value (EV)(~AUD60m).
However, it’s the qualitative aspects and the underlying operational metrics that validate the foundation to grow exponentially. I think Bevan understood and saw this, hence his investment (I wouldn’t bet against him).
What does intelliHR do?
intelliHR is a cloud-based people management platform. It provides companies with a next-generation, cloud-based people management and data analytics platform.
At its core, intelliHR is a people & technology company enabling customers’ progression to strategic, data-driven people management. Technology has always been at the forefront of the company and is the key enabler. They continuously develop their Software-as-a-Service with new features and improvements driven by customer feedback and international thought leadership.
Who is the successful entrepreneur involved in the company?
Bevan Slattery is a serially successful technology entrepreneur who has successfully built 4 companies with a combined value of over AUD9bn (2 of these successes were in the technology industry).
Why would Bevan invest in a company burning so much cash and growing slowly?
I believe Bevan invested because of the gap in the HR market, the ability to effectively launch a Product Led Growth go-to-market strategy, implement value-based pricing, a world class Net Promoter Score (NPS) and the company’s objective to triple, triple, double, double and double its recurring revenue (to become a billion dollar listed SaaS listed company).
Target Addressable Market (TAM)/Market Opportunity
According to IHR, their global addressable market is greater than AUD38bn, which explains their expansion into North America to achieve their growth objectives. They have recently started hiring Canada (Toronto) based sales people.
Product Led Growth (PLG) Strategy
Since COVID, intelliHR have implemented a PLG go-to-market strategy to complement their top-down and partner driven sales strategy.
Initially their free COVID essentials platform saw a massive uptake (refer to diagram above – adding 3,544 clients via this offering) which they have converted 37 clients (refer to diagram below). However, now that the dust is settling uptake is slowing but the company is repositioning their freemium offering by launching eNPS and Wellbeing options to support increased lead generation. SaaS companies that adopt a PLG strategy grow faster for longer, and more cheaply.
Value based pricing
Pricing on value means that intelliHR client’s receive proportionate value for what they pay, and as they start paying more (adding more seats) they get more value. As you can see from the Return on Investment (ROI) image below, intelliHR reduces costs, increases productivity and increases employee wellbeing.
For example, for less than 4 hours at an average hourly rate of a staff member, the platform fee would be covered for the entire year, so productivity and cost-effectiveness can be vastly improved across the business.
This is a scalable pricing model that is value driven, where the value-axis on which pricing has been based is seats. IntelliHR charges based on the seats per month, depending on the user/s and functionality required (refer to pricing below).
Lastly, pricing on seats with a model like this means as the company grows, so will the subscription fees organically (which means greater ARR with little costs).
IntelliHR has an excellent retention number meaning clients are increasingly spending more (even if clients churn or contract, on average they grow their account). It has to be kept in mind that I am not sure how this number has been calculated, but I assume they are using some cohort analysis around these figures (e.g. across clients who signed during the same month, the average revenue across them all, including those that have left or contracted, is 13% more than it was).
For example, if they add 10 clients in January 2019, by February 2020 you’d expect the revenue across those 10 (even if some are no longer clients or are paying less) to be 113% of what they were contracted to pay in January 2019.
NPS score confirms Product Market Fit (PMF)
IntelliHR’s current Net Promoter Score (NPS), which is a good indication of Product Market Fit (PMF), is world class 74 (when compared to global B2B SaaS companies). It tells you how loyal customers are, and a metric that not many companies at this stage (or more mature can tell or would publicly like to tell). What this number tells you is that users love the product, and increasingly so. A low NPS tells you that the product does not solve a problem for a user/group of similar users, so knowing that this number is high, confirms that intelliHR have found the problem and people who suffer from it, and are delighting them.
Lastly, given that the NPS is growing by 14% Year on Year (YoY) they are increasingly delighting their customers. As a result, this will likely result in greater expansion of the product within existing clients because it gives them so much value. Also because they know who benefits and how, the company’s ability to acquire new clients should get easier.
Customer Sentiments Collection Growth
intelliHR provides clients with a world-class tool to keep their finger on the pulse by bringing in positive and negative sentiment analysis into the platform. The tool enables customers to leverage large amounts of data they are collecting from employees.
Sentiment analysis gives businesses a real-time handle on how their workforce is tracking and how they are interacting around performance. The tool allows users to cross filter analytics to enable you to drill down into the source data and look at things like direct negative feedback for example.
This enables clients to diagnose problem areas of the business for improvement or predict future outcomes, such as financial performance. The sentiment analysis allows the business to identify areas of improvement, but the predictive ability is the game changer!
For example, if you have a lot of negative sentiment filtering up for a particular manager, this indicates that there might be a problem there, which allows you to look into it.
As you can see from the 215% Year on Year (YoY) growth above, the number of sentiments being collected is growing exponentially.
The increased data points that are being collected across free and paid subscribers means deeper and richer insights through more refined AI analytics, which means the platform is more deeply embedded into the business’ core operations as they seek to further optimise.
intelliHR has big goals. It has publicly stated that its aim is to Triple, Triple, Double, Double, Double (T2D3) and become a unicorn SaaS company (valuation > USD1bn).
At Phase 2, where it is now (AUD2m), if it does T2D3, it’s ARR will be AUD144m (2, 6, 18, 36, 72, 144).
What are IntelliHR’s most important SaaS based unit economics and operational metrics? How does IHR’s ARR growth compare to other global SaaS companies?
The 4 most important metrics for intelliHR are:
- Gross Profit Margin (GPM)
- Year on Year (YoY) ARR Growth Rate
- Annual Recurring Revenue (ARR) Quick Ratio
- Sales and Marketing Efficiency (using the Net Bessemer Customer Acquisition Ratio)
Gross Profit Margin (GPM)
Gross Profit Margin (GPM) is a commonly misunderstood concept when it comes to technology companies. Software companies enjoy very high margins, usually above 70%.
I believe intelliHR’s GPM is around 80% because they have relatively small amounts of professional services.
This means intelliHR’s GPM are in the 90th Percentile of SaaS companies at its current stage (sub 2.5m ARR).
Year on Year (YoY) ARR Growth Rate
Benchmarking IHR’s ARR growth against comparable B2B SaaS Metrics, its 83% YoY ARR growth rate puts it in the 25th percentile for a company between the AUD1m to AUD2.5m ARR stage (refer to graph below, where I have marked that IHR sits just below the 50th percentile of B2B SaaS companies between 2.5m and 5m ARR using the purple dot).
Please note that the square on each candle in the graph below denotes the 50th and 75th percentile range, and the top and bottom of the stick denotes the 90th and 25th percentiles respectively (90th percentile being the best, 25th percentile being the worst).
Also, for a more detailed breakdown on how I analyse operational metrics and unit economics, I suggest you read my Pointerra (ASX:3DP) article. Reading the 3DP article before the IHR article will give you a better understanding of the most important B2B SaaS operational metrics and unit economics, how to calculate them and why they are important to determine a company’s potential.
It arrived at the AUD2m ARR base less than 6 months ago and has grown its ARR to AU2.8m since then (almost 50% in less than 6 months).
intelliHR has publicly stated that it wants to Triple, Triple, Double, Double, Double (T2D3) and become a unicorn SaaS company, which is the trajectory for SaaS companies that reach a USD1bn valuation.
The graph above shows how the company has grown ARR over the last 24 months from AUD658,000 to AUD2.8m.
The playbook for T2D3 is to expand sales and marketing once you have a solid base of a few million dollars in ARR. This seems to be the area that IHR is at, from which they are setting up a North America arm of the business and expanding into the larger markets/regions to achieve this ambitious growth. However, that all sounds great, but the question to ask is can they scale efficiently?
Annual Recurring Revenue (ARR) Quick Ratio
Over the last 5 quarters, I have estimated that intelliHR has an average SaaS Quick Ratio of 9, which means for every dollar of ACV they lose each quarter they make AUD9.
This puts IntelliHR in the 90th Percentile for Quick Ratio performance with a ratio above 5, which can be seen from the graph below.
intelliHR’s Quick Ratio has been improving over the last 12 months, it is now averaging 9 (up from around 2). It has increased almost 5x when we account for 1.5% quarterly average churn and contraction in ARR (despite its 113% revenue retention, I have included churn and contraction in ARR to be conservative).
The Magic Number (Sales and Marketing Efficiency)
Based on my estimations, using publicly available information they have a Magic Number of 1.2. This means they currently spend AUD1 dollar on sales and marketing and make AUD1.20 of ARR. Essentially, its sales and marketing engine is quite efficient and getting more efficient. However, it is steadily improving as they generated AUD400k in ARR last quarter compared to the same quarter 12 months ago. This is a really positive sign.
A SaaS company’s Sales and Marketing (S&M) Efficiency is commonly referred to as the Magic Number.
I use a derivation of the Magic Number, which is closer to the Bessemer CAC ratio.
As suggested above, you can read more about the Magic Number and other operational metrics and unit economics here.
Based on my analysis, this means they have a Magic Number (Bessemer CAC ratio) of ~1.2 and puts it around the 50th percentile when compared to global venture backed SaaS companies. Refer to the graph below for a benchmark comparison.
This means its sales team and marketing spend is becoming more efficient and productive, which puts the company in a position to scale in a capital efficient way.
I usually prefer underspending and discipline early than overspending and then working out how to operate efficiently. However, this does not necessarily mean this is a bad thing because they are testing different models for scaling, and the fact that it is improving markedly is a great sign.
Another reason why I think they will continue to improve their Magic Number is the increasing number of technology partners they have (e.g. Xero, GO1.com etc), which is currently at 40 and provides high quality customer leads (this drops the cost to acquire clients, which is the most costly sales and marketing related exercise).
Where to from here for IHR?
I believe intelliHR’s SaaS based operational metrics put in in the 75th percentile when compared to global SaaS companies at its current stage.
In terms of what’s next for intelliHR, there is no guarantee of continued success and growth.
However, using operational benchmarks allows an investor to make the most informed decisions and remove some of the emotional-biases when investing in B2B SaaS companies.
Also, the company is filling a gap in the HR market with an effective Product Led Growth go-to-market strategy, value-based pricing, a world class Net Promoter Score (NPS) and establishing a sales and marketing presence in North America.
Further, IHR’s operational metrics are increasingly improving which means it has the potential to become better over time. The quantitative improvements (metrics) validate the qualitative aspects of the business model and market (summarised immediately above).
In summary, I think because of these reasons, intelliHR will begin to re-accelerate its ARR growth and scaling efficiency which it has already shown early signs of. As a result, has the foundation to meet its objective to triple, triple, double, double and double its recurring revenue (to become a billion dollar SaaS company).
How is the company being valued now and what opportunity might this present for investors?
Its current EV is approximately AUD60m (as at 27 November 2020), which puts its EV/ARR Multiple at approximately 23x.
Having regard to the benchmarks in the graphs above, this means IHR’s EV/ARR is high, which means the market has to some extent factored in its likelihood to scale. However, I put this down to Bevan’s tick of approval as opposed to the average investor’s understanding of the business. It must be kept in mind that when Bevan invested almost 6 months ago it was trading at only 7 cents (currently it trades in the low 20’s).
Even at this multiple and EV, this may present a rare opportunity for investors to own a stake in a high quality ASX listed B2B SaaS company. For example, if it triples its ARR to AUD6m, as per its stated objective, the EV/ARR multiple drops to around 9x at current valuation (from current valuation).
Disclaimer: At the time of publishing this article, I own shares in ASX:IHR.