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Elevate Certifiable Geniuses | Financial Section Sustainability

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Page 1: Elevate Certifiable Geniuses | Financial Section Sustainability

Financial InformationSustainability Plan

Page 2: Elevate Certifiable Geniuses | Financial Section Sustainability

Summary Financial Data

Elevate will generate revenues from sale of Internet based bundled products and services to the residential market of the United

States. The Company intends to go to market primarily through 250 direct sales representatives and 1,000 network representatives in

fiscal 2014. The estimated roll out expense is expected to be around $1.3 million. A significant portion of this will be used to procure

product inventory and recruiting and training the representatives.

The company expects to launch its IPTV and security platforms by the second quarter of 2015, which will significantly enhance top-line

growth. Revenues are expected to grow a significant 288% in 2014 and 243% in 2015. Cost of sales will also increase in tandem with the

revenues but at a decelerated pace. On an average, COGS is expected to account for the 60%-80% of the revenues and operating

margin are expected to remain in the range 5%-18%.

PRELIMINARY INCOME STATEMENT

Economic Model Revenue Assumptions

Representatives

Elevate derives revenues primarily from the sale of individual and bundled products. The Company depends on direct representatives

and customer referrals for the sale of these products. Some of the representatives are also the customers of the company and are eli-

gible for greater product rebates. The Company also provides web hosting services to the representatives for managing their accounts.

This provides additional source of income.

Overall, direct sales representatives are the primary revenue generators. These are the students recruited by management directly from

the college campuses. Management expects the number of active sales representatives will play an instrumental role in driving rev-

enues. The Company currently has 50 active sales representa tives in the field. Management intends to hire another 200 sales

represen-tatives throughout the year. Accounting for the attrition, the total number of representatives stands at 151 in 2014.

Network sales representatives are expected to form the largest sales channel and will be the strong positive catalysts for driving future

revenue growth. This group of representatives is formed through customer referrals and comprises existing customers of the company.

It is estimated that each existing and new direct sales representative will bring along with itself 2 to 3 network sales representatives on

an average per year. This will create a multiplier effect, increasing total number of representatives. Representatives are expected to

increase from 494 in 2014 to 12,331 in 2018.

Total Revenues $Cost of Goods Sold $ Gross Profit $Gross Margins

Operating Expenses $EBITDA $EBITDA margin

Depreciation & Amortization $Operating Profits $Operating Margin

Tax Expense $Net Income $Net profit margin

Units outstanding (Par value - $1 per unit)

Earnings per Unit $

Income Statement ($)

9,343,885 25,715,131

73%

18,329,281 7,385,850

21%

918,757 6,467,093

18%

1,694,357 3,953,499

11%

33,676,000 0.12

YEAR 1

35,059,016 136,648,055 44,403,068

92,444,98768%

51,297,551 41,147,436

30%

7,063,881 34,083,555

25%

10,211,004 23,825,675

17%

33,676,000 0.71

381,432,196 143,674,719237,757,477

62%

119,089,971 118,667,507

31%

24,668,503 93,999,004

25%

28,199,701 65,799,303

17%

33,676,000 1.95

330,192,255 542,155,061

62%

236,496,226 305,658,834

35%

56,978,173 248,680,662

29%

74,604,199 174,076,463

20%

33,676,000 5.17

872,347,315 1,769,875,622 670,901,833

1,098,973,789 62%

453,834,717645,139,072

36%

113,935,167 531,203,905

30%

159,361,171 371,842,733

21%

33,676,000 11.04

YEAR 2 YEAR 3 YEAR 4 YEAR 5

Page 3: Elevate Certifiable Geniuses | Financial Section Sustainability

It should be noted that attrition rates in the direct selling industry are high. As a result, a total attrition rate of 80% is considered normal

and within industry averages. It is estimated that roughly 50% of the total direct representatives that are hired will leave the job the with-

in three months and 30% within six months. Approximately 50% of the network sales representatives will leave the job every six months.

Sales from direct representatives are expected to be higher than the network representatives. For example it is assumed that each

direct sales representative can sell 20 bundled products to nearly 20 customers per month or one customer each day on an average,

while network representatives are estimated to sell less than one bundled product per month. Sales are expected to be lower from

network representatives as many of them are not full time representatives. Some of them are the customers of the company and are not

actively selling directly to consumers.

Direct Sales Representatives

Existing Representatives

New Recruits

Attrition rate - 2 mths

Attrition rate - 3 mths

Net Cumulative no. of

representatives% Growth

Network Sales Representatives

Existing Representatives

Representatives (new additions)

Attrition rate - 2 mths

Attrition rate - 3 mths

Net Cumulative no. of

representatives% Growth

Cumulative Sales Rps

Recruitment Assumptions

200

(60)

(14)

151

-

-

1,000

(360)

(44)

494

-

645

2014

151

450

(118)

(26)

405

169%

494

2,500

(940)

(136)

1,625

229%

2,030

2015

405

750

(213)

(51)

799

98%

1,625

5,000

(1,900)

(270)

3,831

136%

4,630

2016

799

1,250

(358)

(82)

1,456

82%

3,831

7,500

(2,900)

(424)

6,978

82%

8,434

2017

1,456

2,500

(711)

(162)

2,783

91%

6,978

12,500

(4,800)

(694)

12,331

77%

15,114

2018

IPTV

Wireless Internet

VoIP Phone

Security Sales

TV Sales

Cell Phone

Direct Rep Sale Unit Assumptions

0.00

6.75

11.25

7.50

11.25

0.75

1st Year

18.75

11.25

11.25

7.50

0.75

1.50

2nd Year

IPTV

Wireless Internet

VoIP Phone

Security Sales

TV Sales

Cell Phone

Network Rep Conversion Rate Assumptions

0%

4%

4%

4%

4%

4%

Half Year

4%

4%

4%

4%

4%

4%

After

50

Unit Sales

Page 4: Elevate Certifiable Geniuses | Financial Section Sustainability

{ 4 }© 2011 ALL RIGHTS RESERVED | ELEVATE | A WHOLLY OWNED SUBSIDIARY OF HIGHLAND BUSINESS SERVICES, INC.

Revenues from some of the products including TV and some security are one-time fixed in nature. The sales made for these products

are for a third party. The company collects one-time fixed commission from these sales. Elevate expects to secure their own IPTV

plat-form and equipment by third quarter 2014. The Company will also secure its own home security platform by 2014. Other than

this, the company plans to build out its wireless network. Elevate intends to offer this service by the second quarter of 2014.

Sales from other products such as VoIP phone, IPTV, wireless Internet, and home security are recurring in nature. The Company col-

lects a one-time activation fee along with monthly recurring commissions. Elevate is expected to sell VoIP phones from the beginning

of 2014, while sale of IPTV and wireless connections will begin from the 2nd quarter of 2015. All home security sales assume the ratio

25%:75%, implying 25% sales made for the third party while the rest is made for the in-house security platform. This is in-line with the

industry standards.

Sales Price Assumptions

Selling price of the each product will vary. It is assumed that price will remain steady over the five year period. Sales price

assumptions for each of the products is listed below –

The business is seasonal in nature, with peak sales and recruitment activities occuring between May and August. It is expected that

the students get more free time to carry out sales activities in the summer holidays.

Cost Analysis

Cost of Sales

In addition to the direct cost of the necessary device required to use the service, the Company’s primary cost of sales is the

commission paid to its sales representatives. There are primarily three forms of commissions paid –

1. Sales commission – These are direct commissions paid to the representative, who made the sales.

2. Recurring monthly commission – These commissions are paid to the company by the customer for

the services availed

3. Commission management – These are commissions paid to the representatives for any sales made

by his team member

Home Security

Home Security HOLD

Digital Phone

TV

IPTV

Wireless Internet

Cell Phone

Website

Postage

Representative Kit

Manager Kit

Sales Price Assumptions

1799.00

199.00

25.00

200.00

100.00

75.00

100.00

9.95

500.00

1250.00

Fixed

40.00

24.95

49.95

49.95

59.95

50.00

Recurring

Page 5: Elevate Certifiable Geniuses | Financial Section Sustainability

Digital PhoneDigital phone (VoIp)Digital phone (VoIp) -shipping fee

VOIPVOIP recurring monthly feeVOIP commission VOIP commission managementVOIP recurring commission

TV

TV sales commissionTV sales commission management

IPTVIPTVIPTV commissionIPTV commission management IPTV commission recurringIPTV monthly fees

Wireless InternetWireless InternetWireless Internet commissioinWireless Internet commission mgtWireless Internet commission recurringWireless Internet monthly fees

Cell PhoneCell phoneCell phone commissionCell phone commission management Cell Phone Commission RecurringCell Phone monthly fees

Home SecurityHome security holdHome securityHome security hold monthly feesHome security commissionHome security hold commission recurringHome security hold commission mgt - 1st year Home security hold commission mgtHome security commission recurring

Website hosting feesRepresentative kitsRepresentative recruting commissionRepresentative website rebateRepresentative product rebateManager kitsManager recruting commissionManager website rebateManager product rebate

Cost of Sales Assumptions ($)

40.009.00

7.0040.0020.00

5.00

80.0020.00

150.0040.0020.00

2.5020.00

100.0040.0020.00

2.5028.00

100.0040.0020.00

2.5035.00

310.00310.00

15.00300.00

5.0050.0050.00

5.00

5.00125.00

50.00250.00500.00200.00200.00250.00

1000.00

Unit Cost

2.00

10.00

5.00

4.00

Unit Cost

Page 6: Elevate Certifiable Geniuses | Financial Section Sustainability

Representatives are also paid recruiting commission for building their sales team. This commission is paid to the one-level up

represen-tative and managers. Other expenses include costs associated with hosting website and product rebates.

Operating Expenses Other operating expenses are fixed in nature, and include costs associated with advertising, marketing, salary, rent, bank charges, etc. This is shown in the chart below.

Operating expenses account for 5% to 13% of total sales for the company. R&D reimbursements, recruiting expenses and salaries to

the full-time employees hold the substantial portion of the operating expense.

Advertising/MarketingBank Service Charges Computer/Internet Incentives Liability/WC Insurance Legal Merchant Fees Miscellaneous Office Supplies Owner Referral Program Postage Recruiting Costs Rent (office) Salaries Sales CommissionsSales Returns/AllowancesTaxes (Payroll)TelephoneTravelUtilities

Total Operating Expenses

Operating Expenses

2,400 22,500

106,776 100,005144,000 133,758

6,000 17,796

713,750 24,914

2,306,760 173,994

1,563,927 11,475,488

71,184 156,393 89,430

266,941 12,744

6,048,060

2014

444,901 3,600

42,000

150,008 172,800

1,340,345 12,000 69,965

1,560,568 97,951

3,910,323480,000

3,029,03435,271,770

279,860302,903258,014

1,049,477 24,000

307,847

14,185,079

2015

1,749,128 5,400

120,000782,951225,012241,920

4,885,324 24,000

195,7383,505,731

274,033 6,670,475

480,0005,409,068

84,377,084782,951540,907412,466

2,936,067 24,000

30,583,164

2016

4,893,444 8,100

240,0001,611,439

337,517338,688

11,323,07936,000

447,622 6,562,724

626,67111,160,828

480,000 10,101,898

167,593,8411,790,4881,010,190

791,0816,714,330

24,000

61,172,174

2017

11,190,551 22,703,49712,150

360,0002,906,048

506,276474,163

23,080,52954,000

908,14012,333,2451,271,396

19,938,524480,000

18,552,797322,237,936

3,632,5591,855,2801,427,070

13,622,09824,000

117,069,285

2018

Page 7: Elevate Certifiable Geniuses | Financial Section Sustainability

Valuation

DCF Valuation

We have used discounted cash flow method to derive the pre-money valuation of the company. As the company is in early growth

stage, we believe a two stage discounted model is appropriate.

We have derived the market risk premium, which is calculated over the risk-free rate, by considering the historical risk premium of the

U.S. equities in the bundled service industry. Market risk premium is considered to be 5.0%. As Elevate’s credibility in the market is

not yet established, we have assumed an above average industry beta of 1.80 to reflect default risk premium and factored 14% for

the liquidity risk premium. Risk free rate is assumed to be the interest rate on 10-year US treasury notes. At the time of preparation

this report, the 10-year US treasury had a yield of 3.62%.

Based on the preceding inputs (risk free rate and the equity risk premium) and the Capital Asset Pricing Model (CAPM), we arrive at a

cost of equity of 28.8%. Assuming post tax cost of debt of 0.0%, we arrive at a weighted average cost of capital (WACC) of 28.8%.

Cost of Equity Equity Risk Premium Spread for company's liquidity Risk Estimated Equity Risk Premium Risk Free Rate Beta Cost of Equity

Cost of Debt Pre-tax Cost of Debt Marginal Tax Rate Cost of Debt

Weighted Average Cost of Capital Debt to Capital Ratio WACC

Terminal Multiple WACC G (Perpetual Growth Rate) Terminal Multiple =(1+G)/(WACC-G)

DCF Valuation Assumptions

5.0%9.0%

14.0%3.6%1.80

28.8%

0.0%24.7%

0.0%

0.0%28.8%

28.8%2.0%3.8x

2014

Page 8: Elevate Certifiable Geniuses | Financial Section Sustainability

Sensitivity Analysis

Gross Asset Value Add: Cash & Equivalents Less: Debt Net Asset Value (NAV) No. of units

Fair Value per Unit (US$)

Post Money Valuation

1,991,373,121100,000

- 1,991,473,121

33,676,000

59.14

1.00%1.50%2.00%2.50%3.00%

68.7269.9171.1572.4573.79

1.60

57.3558.2359.1460.0861.06

1.80

52.6553.4054.1955.0055.84

1.90

48.4649.1249.8050.5151.23

2.0

1.00%1.50%2.00%2.50%3.00%

2,354,398,3982,396,147,3342,439,671,8102,485,085,988

1.60

2,314,318,0851,960,909,6581,991,473,1212,023,197,8102,056,151,186

1.80

1,931,444,810 1,798,421,3621,824,812,4941,852,155,6881,880,503,407

1.90

1,772,933,417 1,632,071,9121,654,234,8341,677,145,9971,700,843,9451,725,369,914

2.0

Page 9: Elevate Certifiable Geniuses | Financial Section Sustainability

Comparative Valuation

We have considered eight companies providing bundled services within the telecom and cable industries. We have considered four

multiples, Price/Sales, Prices/Book Value, Price/Earnings and EV/EBITDA to compare Elevate against the selected peer group.

136,848,05533,676,000

4.06x1.01x4.09

137,760,375

Estimated Revenues Units Outstanding

Sales/unitEstimated P/SEstimated unitholder's value Market Capitalization

Valuation Metrics - Price/Sales

7,385,8505.66x

41,802,6803,704,791

-

45,507,47233,676,000

1.35

Estimated EBITDAEstimated EV/EBITDA

EVAdd: CashLess: Debt

Market ValueUnits OutstandingEstimated unitholder's value

Valuation Metrics - EV/EBITDA

0.12 14.57

1.71

57,590,615 33,676,000 Shares

Estimated Earnings Estimated Price/Earnings

Estimated unitholder's value

Market ValueUnits Outstanding

Valuation Metrics - Price/Earnings

25%25%25%25%

Weight

4.09 137,760,375

101,272,546 57,590,615 45,507,472

$ 85,532,752

3.011.711.35

$ 2.54

Price

Price/SalesPrice/Book ValuePrice/EarningsEV/Revenues

Weighted Average Price

Relative Valuation

10,099,98533,676,000

0.30x10.03x

3.01

101,272,546

Estimated Book ValueUnits Outstanding

BVPUEstimated P/B

Estimated unitholder's value

Market Capitalization

Valuation Metrics - Price/ Book

Market Cap