Analyzing Skype

eBay has now owned Skype for more than four full quarters.  How's that little $4 billion flyer doing?

Answer: Pretty well, actually.  Not amazing, not terrible.  Pretty well.

eBay doesn't release much Skype information, but we can still get a good snapshot:

• After decelerating through Q2 last year, both revenue and user-growth are now reaccelerating. 

• If the current growth trajectory remains stable, the company should do $400-$500 million in revenue in 2007 (which would put the purchase price below 10X revenue--a far cry from the outrageous binge-buy that many commentators described).  I still think eBay was the wrong company to buy Skype and that the "synergy" story management cooked up to explain it was a joke, but the price is looking more reasonable all the time.

• Monthly revenue per user is gradually increasing and now stands at about $0.13.

Want to see for yourself?  Fiddle with the future projections?  Then check out this free model, courtesy of Internet Outsider (now published on Google Docs and Spreadsheets).  See the second page, labeled "key," for an explanation of how the model works and instructions on how to change the assumptions. 

Skype Financial Model

(I've always been curious whether such models would be of general interest...I'm about to find out.  I was also curious about Google Docs and Spreadsheets.  Verdict?  Easy upload.  Lost some formatting, and the absence of a "cell contents" window is annoying, but overall pretty simple.)

ADDENDUM: This is the first time I've used Google Docs & Spreadsheets.   I'm not sure whether this allows anyone to use it (change assumptions, etc.).  Can someone please try signing into Google to see?  You'll have to click "edit" in the lower righthand corner, then sign in.  The ideal arrangement would be to allow every user to save his or her own copy and then manipulate that one, so the assumptions in the base model don't change.  Anyone know how to set that up?

Comments

[Robert Atkinson]

There's a conceptual error between cells P15 and P20. P15 represents year-end subs, while P20 is supposed to represent average monthly rev/sub.

P20 should be about $0.135.

-Robert
www.kupperlin-law.com

[bob]

finally. thank you.

[Alex Daley]

Yes, Robert, it seems like it should be H20:K20/4, or the year's average for monthly ARPU. Otherwise you are looking at a yearly total divided by yearend figure that isn't a total, but just the progressive sum of monthly additions _and_ losses to the registered user count.

[Sean]

With a company like Skype, using revenue multiples to value the company is extremely misleading. The variable costs associated with terminating a PSTN call are extremely high compared to the variable cost of delivering a web page and a display or sponsored search advertisement. As such, the gross margin on Skype Out (the product that generates the overwhelming majority of their revenue) is abysmal compared to eBay as a whole and really any other internet business that generates revenue through advertising or listings (e.g., Google or Yahoo).

[Henry Blodget]

Robert, Thanks. Updated those cells. The quarterly monthly rev is still based on the ending sub number.

Sean... So what kind of gross margin are we talking about at scale? And more importantly, what kind of net? With revenue growing 100%-plus, I still don't think an 8X multiple is outrageous, but certainly depends on the mature operating margin.

[Anonymous]

Gross margins? SAC? Churn? Operating costs?

This is all revenue modeling. Fine work, but without a sense of costs judging the price of $4B as high/low/fair is not much more than a wild guess.

If I offer to sell something very attractive that everyone wants for $0.50, limit one per person per year in the first year, 2 per person per year in the second year, etc., and everyone in the world will takes my offer then I will have revenues of 3B, 6B, 12B, doubling forever... What is my operation worth?

Made a guess? Okay, now what if the thing I'm selling is $1 bills?

[Sean]

Skype obviously doesn't publicly publish their gross margins, but the calling card business is a very good comparable and there are obviously public companies in that space. Taking a look at IDT's 2006 annual report (p. 44-45), you'll see that their calling card business has an average revenue per minute of $0.0736 and an average termination cost per minute of $0.0601, inferring a gross margin of 18%. It wouldn't surprise me if Skype is higher than this, but not significantly so.

As for how this improves with scale, IDT did 15.8 billion minutes with their calling cards in 2006. Skype on the other hand, did 4.2 billion minutes in 2006 (p. 11 of eBay's Q4 earnings presentation). Bottom line - the margins in this business don't get significantly better with scale.

[Sean Ammirati]

I'd recommend you use Zoho or Google Spreadsheet - so no one has to worry about viruses, etc ...

[Jeff]

Easiest way for folks to use / manipulate the spreadsheet themselves is if they "export" it to their own desktop and then they can do what they want with their copy of the Skype financials now saved on their own computer.

[DonDodge]

Henry, I logged in and tried to edit the spreadsheet. It is set to "view only" so I can't edit it. Perhaps "view only" is the default setting.

I can Copy, Export, and Print the spreadsheet, but other options are greyed out since it is "view only"

Don Dodge

[Alex Daley]

Unfortuantely, the model you want--share and let users edit the feilds independantly instead of on the master--is not really available at this point. The workaround is pretty easy though: Just fit File-> Copy Spreadsheet and you can save a copy oif your own which is now editable. It is not as simple as allowing you to embed it in your site with some editable fields, but it works.

Alex

[Alex Daley]

Pardon my wonderful spelling above...

[DonDodge]

Henry, I just set up my own spreadsheet to play around with the Google Spreadsheet features. You can have multiple people edit the spreadsheet if you use the "Collaborate" feature.

Look at the top of the spreadsheet on the far right. There are three buttons, Discuss, Collaborate, Publish. The Discuss feature is like an IM session. The Collaborate feature allows you to Invite members to collaborate on the document. You must name the people and invite them. This allows the invited people to edit the document. Everyone else is view only.

The Publish feature just publishes the document to a URL in view only mode.

I found the spreadsheet a little cumbersome. No easy way to format cells, no way to adjust column width automatically, no easy way to edit cell contents, etc. Lots of really simple but useful things in Excel are missing. Google has a long way to go.

Don

[Victor]

Dvorak on why Viacom doesn't get it:
http://www.marketwatch.com/news/story/viacom-doesnt-get-new-media/story.aspx?guid=%7BF5036D4E%2DEEB0%2D4118%2D83BB%2D13007DBC8691%7D&siteid=yhoo&dist=yhoo

[bungaloo]

Henry...great stuff. There needs to be more of this on the net.

[mb]

Here's a Google Spreadsheets model for GOOG, updated through Q406.

http://spreadsheets.google.com/ccc?key=pfUsmdA_oZDZUTiyz2HMMKA

It includes P&L history back to Q104, so it may save time for those building their own models.

[misha]

this is great. Thank you Henry and others.

Question: While diving into Google's financials, is it easy to figure out specific R&D line items? For example, how has the cost of storage and band affected Google? What's the sensitivity?

It's sort of a rearview mirror type of question, but I wonder how much of Google's success is based on these costs coming down. It definitely made search and hosting much less costly...

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