CSL and Reece Blame WFH for Woes, Site Minder Deep Dive, Qantas Roars, Nvidia Delivers (for now), Blackbird, Sydney v Melbourne and KPop Demon Hunters

22:03Japan, Taiwan. Japan is number One, two, three, four, five, six, seven? Yeah. You're missing a big one, number two. An obvious one? Yeah, Taiwan's not on here, but it could be, it may not have considered it separately. Yeah, there might be political considerations with this list. I'm not sure who made the list. Depending on where it came from. And Singapore? Singapore. Just around the Asian stuff? Okay. You're missing number two, the big one. China? China. Yeah. China's number two. Well, I didn't miss it. I'm shocked by that. I wasn't surprised by China being number two. I'm shocked by that. I thought China could be number one.

22:37Well, China has an increasingly urbanised population. That's one of their problems, right? Well, the reason I think China is high, and I've got no evidence to back this up, this is just a gut feel, is there's so... Go back 25 years, 30 years pre-internet. China's GDP was tiny. China's really increased over the last 20 years. So a lot of people came of age, in terms of not just age age, but shopping age, with internet in China. So they knew nothing else. So versus us and the US, et cetera, which had a very robust bricks and mortar environment. So that must be the... But I would just have thought there's a huge rural and regional population in China.

23:12I just wasn't sure they'd have internet access. Yeah. But obviously the country really... They're probably also not spending much money generally though. So remember, it's a percentage of spend, not raw. So number... Well, the problem with that that you've just raised is if the people that are spending money online are the rich people spending very large dollars online and the people that are not spending money online in the country are poor people spending almost nothing, you're right, then it will skew heavily. Yes, you're absolutely right about that. Number four. I mean, I'll be surprised if India's in the top 25.

23:41Not in the list. Yeah. So they've got that problem, right? Which is, yeah, very, very distributed population, but not very great internet access across the country. Yeah. Number, I wouldn't have guessed five or six. Right. So I'm going to say, is Australia like 15 or something? Yeah, about that. 12. And Canada will be next door to Australia? Canada is number six. Oh, much higher. Okay. More like US. Canada and US are very similar behaviours. I wonder why, because Canada and Australia are usually very similar in almost every aspect. I think technologically Canada is more like the US. Right. In terms of mining and that kind of stuff, it's more like Australia.

24:13But in terms of I think how they shop, it's much more. A lot of US department stores in Canada are, et cetera. How about Deutschland? Germany about nine, France about 13. Okay, so. France and Australia about the same. So it's interesting. So the economy sizes in Europe go Germany, the UK, France. but the internet percentage of spending goes UK, Germany, France which is interesting. And UK is 20 % so the internet percentage is even more interesting. US is 34%, China 31%, UK down to 23 % and you get to Australia is down at 13.9%. So it drops off significantly. So this gives me confidence in this list that Australia is about 13%.

24:51So that would exclude groceries if it were 13 % by the way. That would be about right excluding groceries. And so the US 32 % Actually, no, because I was looking at Coles. We'll talk about Coles later on, hopefully. And Coles' percentage of online versus offline is about 11%, 11%, 12%. So that's right online. It's right in the corner. Yeah, maybe. I think I saw something recently, which is the percentage of online spending in Australia, excluding groceries, was around 13%. But I think that also is groceries. It might be. So it's very surprising the US is 33. One third of all US spending is online.

25:25That's unbelievable. Where would you think? So if you think back. assuming this list is correct. If you think back to 19 to 2000, and the dot-com crash, and Amazon plummeted, in 2001, nobody would have believed that in 2025, it would be one third of spending online. Remember back then, Amazon was still mostly books. It was starting to become the Everything Store, but it was very nice. I remember when I was there in 2002, studying at Boston, and I remember going to Amazon and thinking, oh, there's lots of other stuff on here, like being shocked that there was not just books. And so this is why, look just to digress for a second this is why these futurists it's also ridiculous because the reason you couldn't predict it would be 33 percent in 2025 back in 2000 is what you knew is e-commerce in 2000 there was barely broadband internet in 2000 for a start predominantly e-commerce has been driven by mobile devices well the iphone was nowhere near existing in 2000 And so there were all these drivers of e-commerce uptake that you couldn't conceive.

26:28Maybe you could conceive broadband, but you definitely couldn't conceive that mobile would be huge. I definitely did not think in, I don't know, 2015, that I would watch TV shows on a phone. I thought, no, I would have thought. I had a great science teacher, Barry Tallman in 1995. And I remember he said to us, well before there was car phones, but there was no mobile phones, not really. He goes, in 10 years' time, everybody's going to have a phone in their pocket. And we went, what the hell? Like, nobody believed him. And he was dead right. Maybe it was 14 years. So I think that's why the future is so hard to predict.

27:02You mentioned futurists. I've been, obviously, critical Atlassians, work-from-home policy for a while. I had a futurist until last week. I was going to say. So Don Price was a futurist who we had a bit of a back-and-forth on LinkedIn. I mean, he quit. I thought he got nicely, gently nudged out. Well, I don't know. They said he quit. But what I want to know is, did he predict it? That's all I want to know. that's my only question. Every entrepreneur founder is a futurist. You've got to be able to try and predict the future to run the business and find products that work. I don't even know what a futurist is.

27:31But the notion of hiring a futurist is so counterintuitive to what a founder needs. It's so bizarre that Alassian had a futurist. But also, if you know where the world's going, shouldn't you be the richest person on earth? Totally. Not working for a wage. It doesn't make any sense. I mean, yeah, that's how I feel. Yeah. We're totally in agreement. So, I know you want to get into a lot of substantial stuff. We've got so many stories. This could be like a 14-hour episode. Well, it won't be because I'm quite busy. So did you see the news on Blackbird's 2015 fund during the week? I was surprised by that.

28:04Is that on the run sheet? No. It's not on the run sheet. Well, that's cool. We can talk about this. Good that you looked at the run sheet so closely. Yeah, thank you. I appreciate the support. So my summary of the thing. I'm sure Campbell wasn't in that fund. I thought Campbell was in every fund. I know. It's a bit unclear. year so what they said is this was the quote from blackbird we just missed our objective of a two times net return which i suspect means a doubling after fees back to the investor money on money yeah so you put in one dollar you get two dollar ten two dollars back ten years later after black i think most of those businesses leaving aside the returns haven't sold either away so it turns like zero well i think one thing that um has changed in the last decade is i'm not sure 10 years is long enough to get liquidity from vc investments right and they're two big investments in that fund that are delivering all of the returns are two space technology two space investments and so they may not deliver um like money back for another decade i'll be dubious of those investments as well i don't know i don't know enough about them to comment on them right but but i do know this if you are not quite doubling over 10 years then you've generated a compounding return of seven and a half percent now i just want to tell you i'm going to ask you a little quiz you probably know the answer you're very good on this kind of stuff so the asx 200 over the last decade what's its compounding return 11 so it's only five and a half percent Is that at all?

29:36Yeah, I think so. Oh, so I'm thinking NASDAQ. Well, so S &P 500? I thought it was about 11%. 11%. Isn't it? I was shocked to see that it was double ASX. Like, I know that everyone is involved in - If you took out NVIDIA, Apple, Microsoft, like it wouldn't be - I know everyone who invests, like they all know that this is the case. But like, because that's not my day-to-day job, I was quite shocked that like, we would have been much better investing in the S &P 500 for the last decade. And NASDAQ - Plus you've got currency. Probably even more. Or 13%. Yeah, 15%. So all of these, you can agree with me, I'm sure, that all of these three indices that you could have invested in did not have the downside risk profile of a VC investment.

30:18It's much riskier to invest in VC. The problem is we're analysing the score mid-game here. We talk about this a lot. In 1983, if you said, how are equities? You go, equities, stock markets are the worst. Remember, this has been the worst bear run of 30-year bear run. Then if you went to 1999, you go, oh, how good are stocks? They've been amazing. Then if you went to 2003, oh, how bad are stocks? I know. Then if you look at PE, then how good's PE? Then you look at 2012, how good's VC? 10 years is long enough to say I want to make at least a medium-term length investment, a decade. But the problem is VC is in a quagmire at the moment because nobody can get exits.

30:55So all these disasters. No, but this return is not based on exits. this return is based on like current valuations. And I think this is a bit of a dog of a fund because you go back to the famous 2012 fund and it's like 20x or whatever. This is the bit, we can say Blackbird, you've got to put that in the absolute upper quintile decile of VC funds, maybe number one, right? And so if what you're getting for your risk is 7.5 % or less over 10 years, then obviously that's not a sustainable industry. If you look at the 2002 funds, they're all down. But that's early. I'm sympathetic. But this is a decade in.

31:35And so, Michael, this is my - But remember, the stock market could drop 70%. And you go, oh, how much better is VC? So, that's the problem. We're calling the game halfway through. Well, it's not halfway through for this, though. That's the end. 10 years. But let's not pick on one bad fund. That was the worst fund. You've got to look at all blackbird funds. I'm not picking on it, but I'm kind of leading to this question. So, a fund manager investing in listed equities, they have a benchmark hurdle that they need to get over let's say eight percent a watermark unless you're alex weasel you don't seem to have one well i think even maybe he has they've got right so um that's the least of his problems yeah and so eight percent that's a common one and if you don't get over the eight percent compounded you get no fees yeah and so i don't think feces have a watermark to get over and so you can generate seven and a half percent and not only can you have taken your two and twenty well so you take your so we'll say so you take your two percent a year on along the way and then you take twenty percent of all the gain at the end but the two percent you've taken along the way comes out of the twenty that you take at the end so let's just talk about the twenty at the end it means if you take i don't know i can't remember how this fun was a hundred mil or something if you take a hundred mil and you double it over ten years you still take your twenty million dollars and this was net so it was after they took their fees So it might have been 8.5%, right?

32:53But like you generate 8.5 % as a VC fund over 10 years and are you still entitled to your whole 20 % cut of the upside, do you think? Well, it should be purely based on the upside above the benchmark. Yes. 8 % is too low a benchmark because there's no liquidity as well. It should be like a 15 % benchmark, really. Because the way most funds work is that you have to pass the 8 % benchmark. I'll talk about private equity. So private equity, you have to pass the 8 % benchmark, compounding. but once you pass it you get it on everything not just a bit above the 8 % I'm actually fine with that by the way I prefer to see just on the increment yeah because you're on the buy side of a PE fund yeah but you should be paying on the alpha on the sell side I get why they want it on everything because they want money and actually I'm okay with it because at least there's a hurdle and it's like high enough in my view I find it weird that you're being paid to get market performance So I don't mind paying more on the upside.

33:51I'd rather pay 30 % above. Well, it's not market performance. Like 8 % is doubling in nine years. That's better than... But if the index is 7.5 or whatever the index is. Well, no, but I think it's like five and a half in Australia. But you've got liquidity issues. So that's not really a fair comparison. Whereas you can sell my shares versus like I'm locked in here. I know, but you don't have liquidity issues at the end because they're supposed to give you your money back. That's the problem that's going on in VC. That's another problem. So I thought, I agree with you. Like I'm not flaying Blackbird at all.

34:15like my experiences with Nicky. I think you've got to look at average over all Blackbird's funds. Assume he went in equally on all those. And I think this can't include Canva. Can't. But I just think, once again, we can come back to this same point because we both love Canva. But the VC returns in this country have been driven by Canva. Totally. That's the start and the end of it. And any fund... Blackbird's first fund did have some rippers in there. It had safety culture, had culture. Does it matter? Does it matter compared to Canva? I'm not saying that. Nothing matters. I'm not saying it didn't have other good stuff.

34:45I think it had a Rolo in there maybe. There was some really good investments in there. Nothing matters. All that matters is Canva because any fund that you have that's going to perform X, underperform, overperform, it doesn't matter. Once you put Canva in there. I'm not saying Canva didn't ruin everything in a good way, but I'm saying even if you didn't have Canva, Fund 1 would still be an incredible fund. Yeah. That's my point. Yeah. Unfortunately, Fund 2, not so good. But Fund 1 was incredible. So Fund 3, which was probably a few years later, 2018 maybe, Maybe they had a fund. Have they had five or six now?

35:16It'll be interesting to see how those perform. And definitely I'm not judging Blackbird based on this one. But I thought, I found this quite shocking, to be honest, when I read about it. And I'm assuming the article was right. It was a pretty scant of fact article, though, which is a bit annoying. And the maths didn't quite add. Yeah, the maths didn't matter. But I think the bottom line is they didn't have a great return on that fund. They can't get their money out. That's every VC and P. It's heavily dependent on a couple of space investments. I was surprised. They had a nice graph in that article that showed the movement of investments.

35:47And I was surprised at how many investments basically hadn't moved. Yeah. If you look now, pretty much every VC in the last 10 years has struggled to get any money out. So now's probably the best time to invest in VC because now it's off. You don't want to be investing in hot assets. You want to invest in cold assets, which will become hot. And now VC's cold is now probably the time to invest in it. Yeah, I agree. I happen to have the graph here. So I'm going to tell you, I took a photo of it. so ask nicely you know that business I've heard a New Zealand customer surveying experience which seems amazing yeah so they invested it's hard to work it out but maybe 5 million that same valuation today no movement according to this article 2015 wasn't exactly boom time for valuation either which is even more strange so they have the unrealised value of ask nicely is the same is when they invested.

36:43XY Sense, you know that business? I know a couple of people invested in that. They've got sensors to see the distribution density inside office spaces and things like that. Same story. Exactly the same story. A few you've never heard of went broke. Earth.ai, I mean, surely that URL is even worth something, right? Morse Micro. I've heard of Morse Micro. I thought they did really well. When I look at this, it looks like they invested$4 million and maybe it's worth$6 million unrealized. Oh, I thought that was a really good success. So I'll tell you some that were big successes. So the two big ones are Fleet and Gilmore Space.

37:20And so they are like, we invested five and they're worth 80 and 60 kind of things. Carbon with a K. New Zealand business kind of plugs into zero or something. So it looks like they invested close to zero, like maybe a million dollars, two million. And that's worth almost 20. So that's their third biggest. But of all of these, two, four, six, eight, 10, 12, 14 investments. So 14 investments over 100 mil, that's about right.

37:57Three of them have had exits only. One of them they made money on called Nora. Oh no, sorry, they lost money on that. So they invested, it's very hard to say but five and they made two yeah realized alevio no they got back the one that they invested yeah and shape it looks like they invested two and got back one and they're the only dollar value exits they've had from that fund and i agree with you canva's not written here so it's got to be somewhere but you know you know how these work like there's these new investment fund part and then the growth follow-on part and so that probably was in a different part of the fund Possibly.

38:35Can we change tax? You can move on now. You see, two of probably the best businesses in Australia have produced... Catapults and luxury escapes? Other than those two. Certainly two of the best businesses in Victoria have produced, being CSL and Rhys had something in common this week. Did you see what they had in common? Yes, I did. I alluded to it earlier on. When you were gay or...? Well, they have a few things in common. A couple of things, unfortunately. A tanking share price. Is that. and castigating Melbourne, Victoria, and more particularly Melbourne, as being the source of their woes, essentially.

39:10So CSL chairman and one of the great... So remember, Brian McNamee was CEO of CSL for a long time and was just a superstar. He said, Victoria's entrenched work from home culture was partly responsible for R &D failures at its Melbourne laboratories, arguing there was something fundamentally wrong with how the global economy operates in the state. As a result, the company is tightening work from home policies with office-based employees expected to work from a CSO site three days a week from September 1. One day in the office would have to be a Monday or a Friday. This compares to the existing policy that asks employees to spend half the time in the office.

39:43Meanwhile, Reece, which has been one of the best-performing stocks in the ASX over the last two decades, announced a horror result, with shares slumping 22%, and they're down 63 % this year. Reece's long-time and hugely respected CEO, Peter Wilson, noted, we're based in victoria where there's a huge period of lockdown we have really struggled to uncouple innovation and productivity we've struggled to get people in the office and if you don't do that you aren't going to unleash innovation as part of your strategy did you see the report about his investor presentation no oh my gosh you should go back and read this in the fin apparently he just gave this ultra candid investor 45 minute yeah everything everything's dead and the US has got multi-year disaster.

40:27I've got a theory behind that. It might be totally, I'm not sure, it could be called a conspiracy theory. I don't think so though. I think it's got some merit. You know that business is basically controlled by that family. It's essentially a family business. So I think if you want to privatize a business and you're running a business, don't you say, you know this growth market you're all dreaming about? Well, it's going to be terrible for the next five years, which might be true. I'm not suggesting he's telling a lie. I'm just saying, I would certainly be emphasising that if I was planning on a privatisation at some point and it would not surprise me at all if the family moved to privatise this business.

41:02Like I don't think they're getting any value at the moment for it being a listed company at all. But nor are there much costs because they don't really do much listed-wise. Well, they have to do this. I know, this is one... I've been... This family has traditionally hated engaging with investors. Exactly, so they don't do much engagement. I think that Peter's dad and aunt grandfather like they've never spoke to investors. It's like, invest in us if you want but we're not going to speak to you which I kind of admire. Yeah, I suspect. Anyway, not I suspect. I think it wouldn't shock me if there was a privatisation on the back of this share price.

41:31This is what's crazy, though. So you've got a situation where one of the core themes of reporting season is Victoria is a disaster. But we can be more particular. We can say people in Victoria don't have money to spend, so they're not buying anything. There's a crime wave, so our retail staff are being physically assaulted and we're being robbed of our merchandise in Victoria. Do you see what Bunnings said about Victoria? They said, sales of everything are down except... Machetes? No, well, that's a good guess. They don't sell those. Do you see it? Is it loss? Surveillance systems. Surveillance systems.

42:06Home surveillance systems. I mean, that's the onion, right? But it's true. And so that's going on. Then people are saying work from home is a debacle in Victoria, much worse than anywhere else. I can add to that. Victoria's had consistently the highest unemployment of any state in Australia. Victoria has the second lowest average income of any state in Australia. I think it's just ahead of Tasmania. You can't walk in the streets in the city. There are protests and it's a disaster. And all of this is happening. And by the way, the government in Victoria said, we're going to protect retail workers and make it like a severe penalty for attacking retail workers.

42:43Well, that was 18 months ago. There's still no law, right? All of this is going on. Oh, and there's taxes galore. They're all complaining about it's too expensive to do business. Payroll taxes going up. It's a disaster. And what's the most absurd part about this whole story? This government's going to win the next election. This government's going to win the election next year. This is, you know, I thought carefully about this because I thought if I... It's supposed to be other stuff where you didn't think carefully. Well, yeah, I mostly don't think much about this podcast. Surely it's obvious I don't put a lot of thought into this podcast.

43:12By now, people have caught on to it. So, you know, if I would, or you would, over-promised and under-delivered to the extent that the Victorian government has, you would not be the CEO anymore. You would be out. And I thought, well, why doesn't that happen in politics? They all lie, constantly lie. They don't deliver. But this is particularly bad. And the answer is because there are so many options for investors of where they can put their money. But for voters, they've only got two options. Barely two. And, well, this is the thing, right? So they've got a terrible option re-electing the current government.

43:44Can you imagine how bad they think the alternative is in Victoria? like that is why they keep getting re-elected because there's only two choices and like the greens are not a choice they go backwards at the moment right and so basically the only place to put your vote is in the with the government or in the rubbish bin there are two places to put a vote well i'll vote for the liberal party but like no one else is going to like you know so i think that is the real travesty. It's hard for me to see without some dramatic change that Victoria is going to be any different in four years' time. It'll be worse.

44:21Do you want to hear my slightly contrarian take to your take? You'll be shocked to hear. You think that the government's doing a great job? Everyone should work five days a week from home. Actually four days because they should only have four day work weeks? That sounds like you. Obviously broadly agreed that Victoria's a vast case but I think McNamee and Wilson are two of the best CEOs Victoria's ever produced. Well McNamee's the chairman now. I know, but he was the CEO of the CEO for a number of years. So these guys are the best of the best. What I don't get is them standing up and blaming work from home is, to me, one of the most pathetic CEO behaviour, chairman and CEO behaviour.

44:55These are impressive CEOs. If you want people to work from the office, make them work from the office. Don't blame more on politicians. You have control over your business. You can get people to work from the office. If you're too gutless to get your staff to come back, don't go and blame Jacinta Allen, who's incompetent. But in this regard, she is what she is. We get people working five days in the office. I'm not blaming anybody. I'm not blaming Dan Andrews for my woes. How many staff do you have? 600. Okay. So how many does CSL have? 10 ,000 in Victoria or some crazy number like that. How does that make a difference?

45:22Because I think they feel that if they don't acquiesce to these demands, they're not going to be able to fill the jobs. Where else are these people going to go? If you're a specific scientist working on vaccines for CSL, you're going to walk into the next door and get a job for the same money? I highly doubt it. Well, I don't know that. And also they're spinning off their vaccines business. By the way, they're spitting it off as an in-species distribution to shareholders, is what they said, which will be very interesting. Even worse for Rhys, who obviously they make their store workers go five days a week.

45:53Why aren't they making their office workers go five days a week? This is actually pathetic for them. Well, that's a good point. I tell you, all right, well, you know, I think that unsurprisingly, I think that you're a bit harsh because if they could do it, I think they would. Of course they can. They're choosing not to. They're too gutless. Well, and if all bosses did this, if we all said, let's get one of them on and you should put this to them. I mean, don't hard talk them because like, I don't want, you know, to be persona non grata in business in Victoria. you're never going to buy it in race.

46:24Yeah, exactly. We'll never be unblocked again. But, but I think we should get one of these people on and have this conversation. this is all the more, if this was some random CEO, whatever, this is one of the greatest CEOs of the last two decades. He's done an unbelievable job at race. I take your point. I'm more disappointed that this is the reaction from great executives. These are hack executives, whatever. You kind of expect it. These are the best of the best coming up with pathetic excuses for bad results. Because, you know, when I see you taking out, like, a huge mace, like the, you know, the old school weapon with the spikes on it, and heading towards someone and, like, pulling it back about to club them, my natural instinct is to defend them.

47:02But actually, you might be right about this. Like, it might be hopeless and it might be a pathetic excuse, but it might not. And if you think they're great CEOs, then maybe I'd give them the benefit of the doubt. And I don't say this flippantly. Well, McLeod is the chairman of the CEO. We should cajole one of them into coming in here and explaining why they can't just do that. Because it's a good question. All the banks complain about it as well. We see the ANZ Nuno Maness, who's ANZ now, he's basically said, this is on Friday, he basically said staff who don't come in are going to get their bonus cut and knock out pay rises.

47:32Which is kind of what's happening anyway below the line. Just nobody realises it. Well, you know, I thought the culture wars might have passed their peak, but I don't think so. I think this is going to be a real battleground in the next few years in the culture wars. As a business owner, I love competitors who have two days a week staff. It's just the biggest free kick for us ever. We've got our team in-house, collaborating, high retention, because our data shows very clearly that you're 50 % more likely to leave if you work from home. So by all means, screw whoever, or screw's big like me, workers in the office but all my competitors feel free to let your workers work from home because it gives us a huge competitive advantage yeah well i can i can tell you like when i talk to cafe staff and owners there is no doubt that friday you can barely get a table right yeah like everyone and so i'll say loosely that's working from home so working from home is i can barely get a table at 10 30 in the morning in a cafe and like it's a four-day work week let's call it what is yeah i think in that case well or four and a half or whatever it is yeah but um but yes it'll we should we should have this conversation with somebody that's facing this problem and has blamed us we we have the we have the same like in our business like we had a choice three years ago how do we respond to this work from home thing and we said straight up we're in the office and we're going to tell everybody who comes for a job this is how it is and we've got the best team we ever had who are the most productive ever had and with a higher retention we've ever had so we've what every piece of evidence suggests that this is the obvious way to do it and anybody who allows their staff to work two days from home simply just being a weak and feeble and just not doing that we can get brian mcdamee and let's have a chat to him i mean he's we both love him he's a superstar so and he's both are he's got strong views he's not shy yeah yeah um again every every economist has yet again got it wrong and the trains have yet again got it right and what do you think i'm talking about here i know what you're talking about you must be talking about inflation i am talking about inflation which and of course this was buried deep obviously it's result season but of course when inflation was down a bit it was everywhere now it's up suddenly nobody reported on it so i think people reported oh but barely the inflation rocketed to 2.8 percent last month what did it rocket from i think it was like 2.3 okay well that is rocking yeah uh so john kehoe who's a great journo and economist in the afr said the jump in electricity prices and headline inflation is a preview of what will happen when the government power bill subsidies for households and small businesses expire at the end of the year yeah bear in mind the forecast was 2.3 percent and the price rises were largely caused by housing which is really rent at 3.6 percent food at three percent and alcohol and tobacco at six and a half percent and the result just shows us how wrong the rba were to cave into bullying from the treasurer Jim Chalmers and our conflicted media and banks who had demanded 75 bips in cuts in the last few months despite prices rising around 4 % You really think this is going to stop a cut?

50:30So I think there won't be a cut next month. September which is the next Yeah, they'll just be in October. Well, I think November will be the next or whatever it is. They'll skip one and then they'll cut it the next one. Oh, they'll definitely skip September but I think they'll also skip November. Assuming that this doesn't revert this is a horror result. This makes Michelle look like an absolute But this is a totally predictable result. No one else predicts Only us. Nobody else predicted this. Well, but when it was a lot - Not a single person predicted this. I know, but I tell you why I find that weird.

50:56Because - Because they're morons? Well, if I thought that - Every economist? I just want to say, if I thought they were morons, I wouldn't find it weird. It would be like, well, that's very explicable. They're all morons. But that's not how I think about them. So I tell you why. Because when it was low, everyone said, yeah, but it's being artificially depressed because of energy subsidies. Actually, it wasn't that low as well. It was still 2.3. But you know what my - Off a higher base. People noted the government energy subsidies are artificially depressing inflation. And therefore, it was not obvious that when you remove those subsidies, the inflation will rise.

51:29That's why I always look to core inflation, not the nominal inflation, which actually takes out energy prices. And so I think energy policy in Australia has achieved, it's been unbelievably successful in alienating every single possible constituency. Like if you want clean energy, you're angry because it's too slow and it's not coming. If you want nuclear, well, forget about it. You won't even get into conversation. If you want coal and gas, well, you're alienated. You can't rule out gas in Victoria, I don't think still, right? If you want cheap energy, you can forget about that. And so, like, no one is happy.

52:07Absolutely nobody is happy with energy policy in Australia. It's not just Victoria. It's Queensland, New South Wales. Well, actually, Victoria actually didn't go up because they still have, obviously, the debt-funded binge. But New South Wales did go up, which is why, obviously, across the border was up. Yes, absolutely. So you have another pat on the back for the contrarians. If you're listening to these highly paid economists and not us, obviously, for your podcast, you're doing yourself a disservice. I'm not sure they're that highly paid. Oh, I reckon they're pretty highly paid, these fools.

52:34shouldn't be hanged you're so moderate i'll just move on uh to it from from a disastrous performance to an unbelievable performance and quantus absolutely continues to shoot the lights out despite losing obviously a highly publicized industrial relations case and having a cyber security breach they just announced record earnings and its share price has closed an all-time record of 12 a share which values the national flag carry out 18 billion dollars about double its pre-COVID share price, albeit with more shares on issue. While many expected the carrier to suffer a post-COVID malay as travel normalized, Qantas can use shows just why competitive advantages are so important.

53:13The business grew revenue by 9%, obviously off a pretty high base. Profit was up by 20 % and underlying profit up 15%. Underlying profitable tax was$2.4 billion, up from$2.1. Star of the show was once again Jetstar, who grew its earnings unbelievably from$497 million to $769 million and had an operating margin of 13%, which is pretty incredible for any business, let alone an airline. The business noted that its 20 new Airbus 321s were seeing significant incremental fuel and scale efficiencies and reduced emissions compared to the previous model, which just shows as annoying it is for shareholders to have to draw this capex.

53:51They get a pretty quick payback on these new planes. Qantas' loyalty business, which is arguably one of the best businesses in Australia grew 11%. Profit hit$5.56 million despite launching more expensive Qantas Plus Rewards products. And to top it off, Qantas is big as input. Oil prices remains well below peak level. So everything is just firing on all cylinders here, I do. So we can just say powers. Absolutely. Brand, yes. I mean, they damage their brand, but we always say - As you say, third power of brand. That's right, forgiveness. And so people forgave them pretty quickly. So they've got brand.

54:21The other thing we were talking about branding, Qantas has all three parts of brand. So one of the three elements of brand that you're talking about. For pricing power, they've definitely got that. That's partly switching costs, but huge pricing power. Yeah, reduced acquisition cost is undoubtedly true for Australian customers. They spend almost nothing on marketing. Yep, yep. Basically zero. I mean, any Australian, not any, but many, many Australians, if they were travelling overseas and could pick any airline, would just choose Qantas because they feel it's the national carrier. And you want the points and you've got the status credits.

54:47It's unbelievable. Well, that brings us to switching costs. That's another power. They've got an amazing switching cost. and whenever I'm talking to investors about our business and why we built a loyalty program and I say look at Qantas they charge often 50 % more than Emirates do for the same ticket to London via Dubai. You mean for the same ticket on the same metal. On Emirates metal. Not even their own plate. The identical journey. It's like all they got is different colour on the boarding pass. In fact you might even have a different part in boarding pass. And a little thing that says status credits and a number after it.

55:20It's unbelievable. And obviously you've got lounge access or whatever, but it is, they're switching costs. By the way, Emirates does that with Flow Dubai. They sell the same seat, but it's like, it can sometimes be 100 % more expensive, but you get these status credits with Emirates. I don't think there's a better switching cost for a consumer business in this, in Australia. I agree with you, I agree. We're in agreement with that. It is unbelievable. So they've got switching costs. They've got scale over their domestic competitors, but not over their international competitors. They're at a disadvantage compared to Emirates and Singapore and Qatar and those because state supported.

55:55Another big one. Is Singapore state supported or not? Not officially. Not officially, okay. But they're obviously Changi and there's obviously interlinked. And they've got cornered resources because you can't get slots. I mean, this is like, I don't... That's how many powers? They've got no counterpositioning. That's four powers. Probably got some process power. You say they've got no counterpositioning, but Jetstar was a counterpositioning play. They didn't have to do... Against Ansett. And against themselves. Like, that's the genius of them. But this was 20 years ago. Jetstar, you just said, powered the airline, just in these results.

56:29Yeah, absolutely. But Jetstar was a counter-positioning plate against Qantas, which you could also say, i.e., against the unions, right? So they didn't have to pay the same prices. It's also a better product than growth. It was a different product. It was a cheaper product, a fusion product. Well, but the cheaper product is a counter-position product. Yeah, I agree, but it's not real counter-positioning. It's not like Tesla counter-positioning against combustion cars. Like, it's just a different price product. But there wasn't – they brought that in to compete with what was Virgin Blue at the time.

56:56Yeah, so you're right. Maybe Virgin Blue was the counter position. That was the classic counter. Yeah, yeah. I know you're right about that. Actually, Virgin counter position against Ansett and Qantas. Because Ansett was still around when Virgin launched in 2000. That's right. Well, one of them had to go broke. Ansett went broke. No, but do you know that? Yes. That one of them had to go broke? Absolutely. Yes. And Ansett went broke first. Yeah, it would have been Virgin otherwise, for sure. Yeah, 100%. So what are the powers we've forgotten? Network, no. process power a little bit? I'm not talking about process power.

57:24It smidge of process power. No, they don't. But I can't think of another business that has four powers. Four genuine, not we have to stretch to say kind of, four genuine powers. Microsoft's and Nvidia's do it. But that's a different planet, right? Yeah. Like as a consumer business. In Australia, you mean. Almost every, well, as a consumer business, almost every consumer business struggles to get beyond brand. Amazon's got network with Amazon Prime. It's got scale. Yes, but it's debatable how much of a consumer business that is today. The cornered resource is the one that Qantas has that others don't have.

58:00It's very rare to have a cornered resource as a consumer business. And how the hell do you get a switching cost like that in a consumer business? We're talking generation. Switching cost? No, no, not switching cost. Oh, I've already moved on from that. How do you get a switching cost like Qantas's in a non-airline consumer business? Airlines get it, right? I think Qantas might have it more than any other airline because this is a... Delta. Delta's the Qantas of the US. Singapore with Chris Fly are very strong. I know, but the reason I say it is... And Skyward. There's five or six that have it.

58:33There are real competitors to Delta in the US. But Delta does it so much better than American. But there are real competitors. There is no real competitor to Qantas in Australia. But Singapore is better than Qantas in that respect as well, though, because Singapore owns Singapore. If you look at Pure. And Emirates. Emirates makes 10 billion. Well, I don't know how much Singapore citizens love their Chris Flyer points. They do. They love it. I absolutely love it. Okay, there you go. And Dubai and Skywards, like Emirates and Skywards. Yeah. So there you go. But Qantas is such an unbelievable ecosystem.

59:02And so when are they going to start going badly again? Because, you know, it's a cyclical business, right? So how long until they start going badly? Well, oil's low. So oil's a big one. that you think that they've got this tailwind and one of the big and joe was big on this and i thought he was right there's no reason for oil to rise again in in the medium term like it might fluctuate up and down in the medium term there's no reason if you've got a downside bias on global economy oil drops doesn't go up that's right and but even if even as the economy really strengthens there really is a transition going on more and more of the world's energy is electricity now and so i think like solar's massive and yeah well solar's just another form of electricity right and And so, like, basically, there will be some kind of issues that happen.

59:43I don't know. Some coup in some Venezuela or something. I mean, I don't know. But I think over the medium term, I think those kind of long-term oil shocks, I don't think, are going to be the problem. Well, there hasn't been a real oil shock for 20 years. Before that was 30 years. And so I think they might have. But I think the big concern, and Joe was right on this, or I certainly thought he was, is that Qantas had to buy. Like, Alan Joyce didn't buy any planes for 10 years. and he was horrendous in just holding off on capital expenditure and feathering his own nest. And Vanessa's finally had to go, we've got to buy some planes.

1:00:15She's done that. She's got 20. And obviously he's behind the eight ball because everybody's trying to buy those same, there's two people who make planes really. Obviously there's Chinese and there's Brazilians, but they're not really significant. There's Airbus and there's Boeing. So you've got to buy one of those planes and there's a 5 ,000 plane waiting list or whatever there is. But what they show with Jetstar is when the planes do come, it actually massively increases that profitability. so yes there's a bit of capex there but actually improves profitability so when they can get all these planes living in the next six or seven years like sunrise means like another year which is super annoying you're saying a bull case for the airline this is a bull case yeah so I'm saying that's great and it's easy to not for you you always think of the bear case but like generally it's easy for people to think of a bull case when things are going well but airlines are the reverse they have to go badly Qantas has to go badly eventually right like this is the industry it took Southwest and Ryanair has still never gone badly Like Ryanair has been an incredible success for 30 years.

1:01:07But you're right, every other airline. Most airlines are extremely cyclical and give back all of the profits they've made for shareholders. So if you look at airlines, the airlines have done well. Ryanair and Southwest. Southwest less so lately, but historically, a discount carrier. So discount carriers have proven they can make money, whereas full service carriers invariably burn money. And Qantas, if you look at the Qantas' profitability, its loyalty and its Jetstar is a huge chunk of it. International makes a bit of money now. So they can lose all of International's profit and it'll still be a great business.

1:01:34Yeah, I think that it's hard to see. It's hard for me to see what's going to make them... And like suffer some significant drop in earnings in the next five years. Yeah. There doesn't seem to be really very grey clouds on the horizon. We were all scared about the CapEx stuff, but that's now been proven that they're making so much money. They can afford the CapEx and the CapEx makes them make even more money. We can be honest about this. I know you totally agree with this. So you had an airline that was like okay before COVID, but had this competitor version that took some share off them. and it was a different strategy with Virgin, targeting a similar customer, right?

1:02:13Which wasn't a great Virgin strategy, but it was not good for Qantas either. Then COVID came and then the airline industry stopped and there was no travel. And so that should hurt an airline badly, but the Australian taxpayer just solved that problem for Qantas. So they didn't have to suffer the down. Then the up came tearing back and they got all of the benefit of that up. and in the meantime that competitor went broke and relaunched as a competitor targeting a different kind of customer. I mean, it's like been a dream six years for them. Yeah, absolutely. A dream six years. Yeah, and they've got loyalty at the back just ploughing away.

1:02:51It's probably one of the best businesses going around. Like, if that makes$500 million and just grows 10 % every year, it's an unbelievable business. And they've got the right leadership in place as a chairman and CEO, like capable leadership. Your boy John Mullins just actually smoking it and Vanessa's done a great job. So I would say, and to finish off by saying, and so yes, they got this hefty fine from Justice Michael Lee. I've heard of Justice Michael Lee. He's the only judge. When he's running a judge, he's thinking, how can I get my name in the news more? What's the law? He does have a great turn of phrase, and I think he's very charismatic as a judge, and he just seems to be doing every case of significance.

1:03:30Yeah, this is ridiculous. There are other judges in the whole country. I think he does something that is very important and not very common, which is rights judgments quickly, which I think is one of the big advantages, right? And so, you know, they got this big fine. Unfortunately, the union got$50 million of it, so we're going to see lots more lawsuits coming. But that$140 million or whatever it is, $150 million or whatever the number was, like that's not consequential to the gain. They're making$100 million extra a year for it. Well, that's it. The gain that they got from breaking the law is so material that it's worth the fine commercially.

1:04:03I actually had an argument with a friend of the pod, joe astin about this because obviously joe's been very critical of the whole we had an argument i'm not advocating breaking the law and screwing over my point is my point is the law is whatever the government of day chooses the law to be like is your position that if i've got forget back not talking about if i've got a team of 100 people in my working in melbourne and i'm paying them 100 grand a year but everyone in the world is paying 70 grand a year for the same thing do i have to keep these people employed forever no i don't think that's yes That's essentially what the union's saying.

1:04:34Yes. You can never, ever fire these beautiful, poor baggage handlers. They can just be getting paid more than every other baggage handler in the world. Have a big Qantas try and match their competitors. Listen, you're not going to have me fight you in an argument in supporting unions. I don't know if you saw this, but the Stevedo has just got a 36 % pay rise over four years. 48 % if you're a casual. I mean, that's not bad. I'll do that job. And no, and some prohibition on automation. Yeah. I mean, that's pretty crazy. I don't know what those Steve O 'Compe is doing. But my point is this, what would have happened?

1:05:04I don't think Justice Lee could have given them a billion dollar fine. I don't think that was open to him. I think 120 was the max. But what would have happened if he would have given them a billion, let's say he was able to, what do you think would have happened if he would have given them a billion dollar fine? That would have really hurt the share price, taken the wind out of their sails, and it would have made people in that organisation say, that was really not worth it from a financial and reputational point of view. Clearly that's not the case. with this fine. Yeah. And so I agree with you that if you're going to have a law, it should have teeth.

1:05:37Quantity's going to actually settle for 60 million. This is the Joyce regime. This is one of Joyce's other great stuff. Oh, yeah. They should never have fought this. Yeah, it's just been settled day one. A hundred percent. Yeah, it was ridiculous. Since we're talking about travel, can we keep talking about travel? We'll definitely keep talking about travel. We'll go to a super quick break first. We'll be right back with your hot breaking story.

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1:07:30And we're back. And in what is feeling more and more like 1999, popular hotel technology platform, SightMinder, skyrocketed 26 % last week after announcing revenue rose 18 % and underlying EBITDA surging from$900 ,000 to$14 million. Free cash flow also improved from negative 6.4 to positive 4.7. CEO Sankar Narayan proudly noted that since our IPO, we've improved underlying EBITDA by$36.7 million, from a$22.4 million loss to a$14 million profit, while maintaining strong revenue growth. Sightminder share price rose to a near record$666, valuing the company at almost$2 billion, doubling since April.

1:08:12Adir. Well, I both agree and disagree with you about this feeling like$19.99, because on the one hand, there are some very good things about this result, and on the other hand, I'm going to tell you some different things about this result that are hidden in the detail. Yeah. Always, always in investor presentations, read the appendices. That would be my tip to everyone. As in a presentation, not that, not the annual report. That's right. So whenever someone presents something in an investor deck and they use metrics that are metrics that make them look good, they have to reference how they came to those metrics somewhere and almost invariably it's in the appendices.

1:08:55So the place to look for the hidden things often is in the appendices. I can start off talking about Sightminder though by saying this. Les Zekkely, one of maybe the most successful angel investor in Australia. Probably the most, number one. Number one. With his hotel club before. This is in 1998. I think it was the very first exit. Hotel club great exit. Yeah. And so Sightminder at the IPO, almost none of the IPO money went into the company. Yeah. I don't remember this, but TCV exited entirely at the IPO, the US VC. Crossover firm. Yep. Crossover, exactly. And Les and Mike Ford, the founder, I think he pocketed$85 million at the IPO.

1:09:37Yeah. And Les pocketed$100 million at the IPO. And in November, he sold the remainder of his shares and stepped off the board. Yeah. For another$100 million. So this has been pretty good for Les. 17 years, but still, I'd take 200 mil over 17 years. He very much mentored. 100%. We feel the same way about Les, and he's a great guy, a tremendous investor. And so the interesting thing is that Les was on the board, and he sold out essentially all of his shares. He's now sold them all, but he sold, I don't know, 15 of 16 mil or whatever the numbers were in November last year at a price that started with a six.

1:10:15Yeah. and then he stepped off the board and two months later the price went down to a one that started with a four yeah and it's now back to a price that starts with a six and so that's very interesting isn't it if Les would have held on to sell today another what's that nine months he would have just gotten the same price that he got nine months ago and so I think the question is like what's this company actually worth right what you're saying is the share price has been up and down it's been a rollercoaster yeah and I think Les looked at the price I mean you know obviously he's got other things in his life and this money is not going to change his life.

1:10:46But I think it may have felt obvious to people inside the business that it would be hard to move north of$6. But these results, there are some very good things about these results. The growth in revenue is real. It's come across all of its markets, which is like Australia. It's a very international business as well. US is the biggest part of its business, I think. I don't think it is. I think US is smaller than Australia and EMEA. I think US is the third bid. but all the bits grew. So that was strong. And we're talking about switching costs. This is a business with switching costs. You should explain what this business does.

1:11:22It does a few things, but how it started, it was effectively as a switch or what we call a channel manager. So let's say an online travel agent, let's use Luxury Escapes as an example, but it could be Booking.com or Expedia or Traveloka or Ctrip. If we want to connect to a hotel as a marketplace, so you think that when the catch guys, when the cooking guys became a marketplace, they use a pretty simple piece of software called Miracle it used to be magento and it's pretty easy to run a marketplace of product because you've got effectively one skew per product so you could have different sizes of shoes but it's one skew if you're a tv there's the tv and maybe it's a 60 centimeter 60 inch or 50 inch but there's a couple of skews you're talking about travel you could have like thousands and thousands of skews per hotel because every date's got a different price and within a date there's different prices if you're booking 10 days away or 60 days away or 100 days away if you're booking on a weekend if you're booking three days, booking five days, if you're booking two adults, booking one out, there's a whole bunch of different, to manage that.

1:12:16And also hotels want to give last room availability. So what you don't want to do is, let's say we're selling the Langham, which I'm looking at here. If we're selling the Langham and Booking.com selling the Langham, and we're both selling the same room, we both don't want to sell the same room and one of our customers not get the room. So you need to have some sort of technology that communicates between the hotel and the online travel agent. And that's what SiteMinder provides basically. And they're not the only ones. they tend to target more the independent, slightly smaller part of the market.

1:12:42And there's Darby Soft and Synexis, which target the sort of larger hotel chains and the larger independent chain. But SiteMinder's got this great product that once you're a hotel and you're set up with SiteMinder, it's pretty hard and not much point to switch. So the switching costs are up there with Oracle and SAP. It's very, maybe not as bad as the massive integrated enterprise software, but it's a really big switching cost to switch from a SiteMinder to a TravelClick or to a Synexis. Yeah, so I think I had some interactions with this business because I once bought a company out of liquidation that was a hotel booking site.

1:13:15I've told you about this. And they had a very big debt that they owed to Mike at Sightminder. And it wasn't my debt. If liquidation, that would have gone with the process. They would have spent a creditor. Yes, he agreed it wasn't my debt. But then I wanted to keep using his platform and his service. And actually, he was fantastic to deal with. Yeah, I've worked on him last time. Really fantastic to deal with. So I've got nothing but good things to say about Sightminder. Obviously, Mike's long retired. He retired a couple of years ago. Long retired a couple of years ago. So what we want to ask about businesses to figure out if they're worth$1.8 billion is how much money they make.

1:13:49And as usual, this is not an easy question to answer. Yeah. And one of the issues is they put something in their profit and loss. Sorry, they put something in their investor briefing, which they love a lot and which you just read out. and you stated it as if it was absolute fact. And it's called underlying EBITDA. They like that number. They even use that number for their rule of 40. So let's look at what that number is. Yeah, I think if you look at the net number, it's a loss-making business. So that puts a lot of shade on the EBITDA number. Well, yeah, so their net number, so they lost$25 million last year pre-tax.

1:14:29We're not paying tax on a$25 million loss. and this year they lost 15 million dollars and their revenue went up 19 percent and so i looked at that npat and i thought but sometimes it can be a bit hard to measure npat because 29 million dollars of their expenses this year was depreciation and amortization that sits in the npat and so we want to dig into that how much is that staff were we going to come to that that's that's absolutely the right question unsurprisingly and so just to do a very quick recap in these businesses like software businesses a significant chunk of your employees are doing development not research and development because research you're not supposed to capitalize but development which is writing software that is creating an asset that you're going to monetize in future years as well as this year or maybe not even this year instead of just saying that's an expense you put it on the balance sheet it becomes an asset and then over a few years you amortize it as an expense each year as effectively as if it was a physical asset being worn down with wear and tear yeah and it's equivalent of building a factory that's you've got this factory built so we shouldn't be expensing the factory the first year you build it we should be spending over the factory's life so conceptually we don't mind that at all and in fact especially for a sass business and a company you might think well companies love this because it means they can report higher profits because they don't have to expense it but also the ato loves this as well because the ato doesn't like it when you can expense a whole lot of stuff on your profit and loss because maybe you're going to make a$20 million loss, but$30 million of that was staff that are doing development, they'd much rather you can't expense that$30 million because then you make a$10 million profit and you have to pay them tax.

1:16:05So everyone gets together and says, yeah, yeah, we should make this an intangible asset on the balance sheet. And we should pretend, as you said, it's like a factory and a factory will be depreciated because it's a physical asset. This is an intangible asset. It will be amortized down. Okay. So I don't have an issue with that. And I also don't have an issue with the fact, like accounting standards have got some problems, as we've discussed. It's less of an issue here, but like more and more because of craziness in accounting standards, you need adjusted or underlying numbers. So let's look at their underlying EBITDA because they're very excited about their underlying EBITDA.

1:16:37And they said their underlying EBITDA went from$855 ,000 in 2024 to$14.3 million in 2025. that's pretty cool and what's especially cool is it means that 13 million of the 36 million dollars in incremental revenue that they got flowed all the way through to underlying EBITDA now by the way we'll come back to that as well but I don't think that's a good number like that's like a bit over a third and so I don't think that's enough of incremental revenue flowing through but this is what they've done to get their underlying EBITDA from their part of the reason why that number wasn't as high as you would have liked because that increased, massively increased marketing costs as well.

1:17:18That's right. So this is, you know, remember I said last week, you want to work out is something an elephant, which means as it gets bigger, it gets worse and it costs more money and eats more food, or is it an ant where as it gets better, it becomes a whole colony and becomes super efficient? And so that's the question about this. And so this is how they turn their$24 million of loss after income tax into a$14 million underlying EBITDA profit. Also, I should add, the actual net profit didn't really improve that much year and year. So whilst EBITDA massively flicked, as you said, the actual net loss, the real loss, $26 million or$23 million.

1:17:54Neither great. Yep. So this is the first and biggest thing they do. They take$29 million of depreciation, amortization and impairment, which is mostly amortization, because of the software asset, and they get rid of that. And they say, we didn't really spend that money this year. Let's just get rid of that. And then they do a couple of things around the edges, change the income tax expense, obviously, and that gives them their reported EBITDA. And that jumps to$7 million in the black from$24.5 million in the red at the profit after tax line. What do you think my problem is with just taking out the$29 million of depreciation and amortization?

1:18:37Well, you've got to spend that money to build the software for a start. Yeah, that's one problem. but like if you're going to take out your amortization, which is the cost of people that you employed in the past that are finally hitting the expense line, and you say, well, that's not today's expenses. They were the past expenses. Then maybe I'd want to know, well, probably what you should put in there is what you're spending now. And it turns out that this year, they spent$26 million on people that they capitalized onto the balance sheet. And so I would say, instead of a$7 million reported EBITDA after they reversed the depreciation amortisation, they should then go and put$26 million of costs back in there and they might be at$1 million.

1:19:20So let's call it break-even. But as we talk about... Well, that's what Catapult does, by the way. I think you guys are too honest. I think there is probably a middle... Well, nothing they did is wrong accounting-wise. When we compare, we talk about satire. Well, nothing can be wrong when it's an underlying number because it's non-dab. But forget that underlying or not. I think this is misleading. I don't fully agree. Well, what does this number represent? This number represents the amount of money that we made this year if you exclude all of the people that we paid who were involved in developing our software.

1:19:54Well, what does that number mean? Hang on, what does that number mean? They wouldn't be taking all of them out because you look at the total expense. No, no, no. Hang on. they're not taking it out listen to what I'm saying they're taking all of the depreciation and amortisation out and they're putting none of the forget depreciation we're talking about it I made this point with Setire very voraciously and one of the main reasons I thought they would go to zero and promptly are is Setire A isn't a real tech business they had like no real developers or they had a tiny amount of developers offshore these guys are a tech business they spend Setire Setire expense I think you're missing my point no I'm having to make my point.

1:20:33Satire spent, basically 100 % of what they spent on wages, Satire capitalised. So they just pretend that these wages didn't exist and that's why they made this MagBelief profit. SightMiner spent$120 million on employees and a quarter of that they capitalise and they ignore. Is a quarter of your total wage bill for a SaaS business unreasonable? I'd argue it probably isn't based on what most companies are doing. Then put the amortisation and if you're paying for people, they've got to cost money at some point in time like let's say you've got a company and you've got a wage bill of$100 million of staff and$25 million of the but that's EBITDA if you want to use EBITDA when do you pay for those people?

1:21:11well look at the net profit line then ignore the EBITDA number this is your you have this thing about EBITDA oh how dare you not call amortization EBITDA amortization is excluded from EBITDA I don't care what the letters are I would call this I would call this EBIT I would call this management EBIT but it's not management EBIT it's EBITDA But what's the point of this number? What does it tell you? You can argue that... What does it tell you? You can make that argument, but you can't say... I don't think they've been dishonest in any way in reporting this number. No, I agree with you about that.

1:21:41It's the same argument I had with you two weeks ago, which is, you can do this and call it EBITDA, and it's not mathematically wrong. But pretty much everyone does this, is my point. So what does it tell you? What does this number mean? I'm going to give you a number that says this. It's going to be the revenue we generated. Just listen to what I'm saying. The revenue we generated minus all of our expenses, except for the people developing our software. Well, you're the one who doesn't want to claim share-based payments aren't a real expense. That's a much more real expense than this. Hang on.

1:22:11The difference is... When are you going to... How do you want to work out... You think I'm just going to pretend that this dilution doesn't exist and you're fine with that. Well, that 26 mil includes share-based payments, in fairness. They've got 11 mil of share-based payments. Not just to those people. In Australia, you have to claim, you can't share-based payments. We're not in the US. I know, but make believe share-based doesn't exist. So I'm going to say numbers. So I'll tell you, our mission is to say, we're going to produce a bottom line number reflective of what this company actually made this year.

1:22:38The reason why people, and you can agree or not agree with capitalisation, but most businesses do it now. I agree with capitalisation. I'm trying to, this is my objective. But that's the whole point of EBITDA. Help me achieve this objective. Help me achieve this objective. You should be complaining about EBITDA and not complaining about the capitalisation is the problem. I'm going to tell you a line item and you're going to say in or out for my objective. My objective is I want to produce a number that represents... You want a cash EBITDA number. No. It's what you want. Listen to my comment. I want to produce a number that tells me this is a proxy for how much money the business actually made this year.

1:23:13Don't call it EBITDA. We're going to keep it long form. That's my objective. That's my mission, okay? So number one, do you agree that the top number is revenue? Yes, that should be the top number. Yeah. Not controversial. Okay. Now we have to start taking things out of that revenue number. And so they've got some direct costs. I don't know what they are. By the way, their direct costs went up from 23.5 % of revenue to 25 % with a 19 % increase in revenue. That feels like an elephant to me, not an ant farm. That's not good news. I don't even know what their direct costs are, but they went up. We can talk about that.

1:23:46I'll probably end up agreeing with you on valuation. I think on this point. Let's keep going. So direct costs, you want to take those out, right? Do that. Cogs. Yeah, cogs. Out. Yep. and like rent and all of that stuff yep we want to put that as an expense we'd like to put that as an expense right yeah and marketing yep that's going to be an expense in our thing we're taking that out and all of the people that don't develop software we're going to take them out as an expense okay so all we've got left is the people that develop software so what should we do about the 26 million dollars we spent this year on people who develop software if our objective is to create a number that represents how much money we actually made this year as a business.

1:24:26What should we do with that$26 million? Can I ask you a similar question? I knew you wouldn't want to answer my question. No, I'm not answering any question until you tell me what do you do with that$26 million to produce the bottom line objective that I'm looking for. Accounting standards say that you can capitalise as a portion of this. I know what you think about accounting standards. Don't use accounting standards. Tell me the answer. What are you going to do with that$26 million? If I'm building a factory and I've hired builders to build this. This is like talking to Anthony Albanese. If I hire builders to build that factory, whether I employ them or don't, do you put the cost of those builders on your P &L?

1:25:01They've built the factory for you. You've got this factory. You've built this asset. Do you include that or not? Am I building the factory? While you're building the factory. Am I building a new factory every year? Who knows? No, that's an important question. What's the answer? The answer is no, of course. But I'm building software every year. Part of the principle is your software cost should cap out. You build the software and eventually it caps out is the argument I would make. Well, last year they spent 25 mil on people that build software. This year they spent 26 mil on people that build software.

1:25:28What do you want me to put in there as an expense? You can choose. I don't love EBITDA. My point is you're quoting EBITDA. I want to put in 26 mil. You're trying to trick me. No, I'm not tricking you. It's not a trick. You're too smart to be tricked. How am I going to trick you? I'll tell you why I want to put 26 mil in. because every year it's not diminishing every year they're spending circa the same amount of money should diminish his percentage of revenue is the point okay good business should be diminishing all right so that means that if i put in the dollar value that they spent on these developers every year given that they're spending it every single year then over time that would work well because the dollar value might go up but the percentage is diminishing and so that's why i want to put the 26 million because what i'm saying to you is instead of given that the number is almost flat instead of saying well let's go through this whole amortization and bring it back in and whatever it's just simpler for me to say put all of the staff costs in there for this year just forgetting EBITDA then looking at EBITDA and just saying we should never look at EBITDA which i would agree with you on well like i'm no issue with that i'm happy to adjust the EBITDA but you're saying yes these guys are terrible just ignore the EBITDA number yes i think we should Well, the problem is this.

1:26:43The EBIT number includes whatever the amortisation was, which might be very mismatched from the actual expenditure this year. In this case, it's not. It's a bit higher. But given that they're almost the same, yes, you're right. I would say to you, just look at the EBIT number. But I'm saying to you more as a conceptual idea. I'm trying to figure out, with all of this dancing to and fro, what was the real profitability of this company this year? and what I'm telling you is... What you want is an underlying EBIT number, essentially. That's what I said many sentences ago. And the reason I want that is because I do not think it's in any way dishonest for an EBITDA number to take out the amortisation and not put in the capitalised developer expenses, which is why I think that this underlying EBITDA number is a useless number.

1:27:37We agree. We totally agree. So, it gets... So EBITDA's always, like Warren Buffett's been talking about this for 30 years. Like EBITDA for a factory business includes the cost of building a factory. Well, you need to build that factory. So just ignoring the fact that this factory cost exists is also wrong. So you can argue EBITDA as a principal has always been so prone to manipulation. So you're with me on this. Like, because this is, because you say you're with me, but in the intro, in the intro, you reported their underlying EBITDA number as the number you wanted to use. And that's the number they used for their rule of 40.

1:28:09and I do not agree with that number. I chose that number to reflect what they were saying. But my point eventually in this business was you look at the profit after tax, profit for tax number, which is negative, which sort of casts that whole EBITDA number. So I would look at that. So I would say, I'm going to look at this. I'm going to say something uncontroversial and I'm going to say something for you which is going to be a bit controversial. So I would say, instead of using an EBIT, I want to get the EBITDA number and then I want to put the capitalised development back in so it's more relevant to today than the EBIT.

1:28:38But then the DA become, like, the whole point of EBITDA is taking that DA. Yeah, so I want to use EBITDA, but the way I'm going to turn it into EBIT, is why I call it management EBIT, is instead of putting the amortisation in, which is yesterday's number, I'm going to use the capex, but then I'm going to do something you're going to hate. What am I going to do? Take out share-based payments. That's 11 mil. And so that would take what I would call a management EBIT. I know, I can't defend it. again you move the less i know include the relevant i'm just gonna pay everybody in shares i i'm gonna you know what i'm gonna tell every single luxury space employee i'm not gonna pay you guys i'm gonna pay you in shares and i did gonna pay 10 million dollars this business because we've got no employee expense anymore so let's not we're gonna magically evaporate my employees so we can agree yes all right so i'm gonna i'm gonna i'm gonna just say agree to disagree and i can't and also like the argument that i can formulate about why i feel this it's not powerful or comprehensive enough for me to be able to defeat you in this argument okay but like i feel like i feel certain ways maybe i've been impacted or influenced by the fact that i'm involved with public companies but like i'm not going to argue with you about it we can definitely agree that a dear and adam's management ebit so now you've got ownership of this as well is basically a million dollars let's call it break even because i'll come back to that on valuation yeah that is not the number that you read out at the start this number that we got to now which fluffing you just So this number that they get to after taking their EBITDA number of 7 mil, that's only reported EBITDA.

1:30:08It gets bigger than that. They want their underlying EBITDA number. So they go and put back in$6.7 million of restructuring and other costs. Last year was$2 million. And do you want to know what this$6 million is? And you tell me whether you think this should be put back in. This pertains to, I'm going to say some key initiatives that cost money that they said was so abnormal, despite the line item existing for$2 million last year, it was so abnormal, they shouldn't be included in the dollar value of underlying EBITDA. They should be taken out. Changes to the technology and data teams to help unlock the power of AI and proprietary data opportunities across the business.

1:30:47Now, one is, I don't actually know what that is, but that feels like a cost of doing business. Sounds like a normal choice. Number two, changes to the sales and marketing teams to promote connection with high-value hotelier properties. I think that means sales. Yeah. Globalization of SiteMinder's employee base. Approximately 50 % of employees are now located in Asia or Latin America. Do you mean employee expenses? I think that that's... And arguably less lower employee expenses because it's cheaper. So I don't support that at all. And so my management EBITDA number for this business is break even.

1:31:19Okay. So you've got a business doing$225 million of revenue. Yeah. growing 18 or 19 percent at break even i would call that they say their rule of 40 21 i would say it's 18 or 19 it's kind of similar because the ebitd number they use is yeah not relevant either way yeah but um and so the question is what would it take for me to think that this business is worth 1.8 billion dollars here's a spoiler i don't think it's worth that today okay but so i think you tell me if you disagree if this business could grow at 18 a year Yeah. I think I'd pay 30 times earnings for this business. 30 times. Which earnings?

1:31:59That 40 different earning lines? I think I'd pay 30 times what I, the real money the business is producing before tax. And which you said was how many millions? Zero at the moment. Okay, zero. Okay. You're paying it at zero. I'm putting it, well, I'm not filling it at zero because it's got potential. Okay. Because I'm going to finish this by saying I would not short this stock, but I want to tell you why. I know. This is what I want to tell you. So let's say I'm prepared to pay 30. We actually work, we're great partners of SiteMiner. I just let the caveat. Yeah. And Pat's the chairman and a great friend of the firm.

1:32:27Well, I think we spend a lot of time saying they're very good people and the business is good and great product market fit. Yeah. But then I think what would it take to make me want to buy them? Well, I would probably pay 30 times historical management EBIT for them. That would be my number. Yeah. And then, all right, so what's that number? Well, it's pretty easy to work out. At$1.8 billion, it's like$60 million of management EBIT, right? that's the number times 30 makes 1.8 billion so i need 60 million i'm at zero so i need to go up by 60 yeah okay now it just so happens that if you work this out and you i won't bore you with this but when you work out how much of the incremental revenue is flowing through to management ebit because they're increasing their marketing spend faster than they're increasing revenue but they're not increasing their people spend as fast they're keeping about a quarter of incremental revenue flowing through to management EBIT.

1:33:22So I can just correct that marketing spend actually wasn't up that much. So it went from 7.4 to 9.6, whatever that is. So two-sevenths is 28, 29%. So that's faster than revenue growth. That's my point. Yeah. And so I'm telling you, you should take my word for this, they're keeping about 25 % of their incremental revenue down to this management EBIT line. And so this is a pretty simple equation. To figure out how much revenue I need, assuming that margin stays the same, to get$60 million of management EBIT. I just multiply by four. Which is basically their current revenue. A bit under, yeah. It's come where it's 224, but yeah.

1:33:57A bit over. But let's call it, let's just say it's the same. You'll see why I'm saying this. So it's going to double the revenue. Yeah. And I said to you, let's say they grow at 18%. What a convenient percentage. That means it doubles in four years. Yeah. And so what I'm saying to you is, I think if they keep this revenue growth rate for the next four years, 18%, even a bit lower than their current one, and they keep the same incremental revenue flow through to Adam and Adir's, see, I put your name first so you'll take more emotional ownership of it, to Adam and Adir's management EBIT line, I think in four years, they're good value at this price.

1:34:30And the reason I wouldn't short - That's four years away. I know. And the reason I wouldn't short them is because they might do it faster. They might decide to cut some costs. That would be nice, right? Yeah. They could accelerate this significantly. and I think that this business is much too expensive to buy but I think it's too good and too close to being fair value to short. That's what I think this business is. This business dropped to like under a billion and I thought actually it's actually pretty good. Yes, I think that you could probably have bought it at that price. Yeah, when it dropped to a billion, great value and above a billion, I don't know how you could be buying it.

1:35:08So I think, I don't know if Les Zekely did my analysis here. He definitely didn't have to fight with you like this but I think he got it right. You'd be shocked I didn't consult me before he sold the shares. Yeah, because he was scared of you just getting caught in EBITDA, that's why. But I will say, I think he got the valuation right. Absolutely. Yeah, but I don't think it was crazy. I think he sold at a toppy price which is where it is back to now but I think this is fundamentally a good business. Yeah, he's got switching costs, got some brand. And in three to four years it will look appealing at this price.

1:35:43Yeah, yeah. Anyway, we think it's a great business, just like every good business. We think ProMedicus is an incredible business, but that's overpriced. I think Atlassian is actually a pretty good business, just overpriced. So it's not as if these businesses are bad business, they're just overpriced business. Well, ProMedicus, you can't short, not because it's a good business. It's a great business. It's an unbelievable business. You can't short it because of the FOMO that exists in the market, keeping the price up. Yep, and it's such a great business. Low to short religions, also low to shorting.

1:36:10Atlassian, it's dangerous shorting because if they cut some costs, they'll turn that business around. So that's a dangerous game. We'll make plenty of money if you listen to us when we said to short it. That's right. Well, then it was easy to short. I agree with you on that. Yeah. Speaking of big businesses who are doing very well, I want to wrap up with the world's largest and possibly most important bellwether. Who am I talking about? NVIDIA would be my guess. NVIDIA announced the results last week. And of course, they beat expectations. A NVIDIA beat is not like a normal beat because the cost of the stock did drop on the news, albeit it has rebounded since.

1:36:44Revenue for the six-month period grew from$56 billion to$90 billion. How is that for great? From$56 billion to$90 billion. And net income rocketed from$31 billion to$45 billion, which is just ridiculous. Investors were unimpressed by NVIDIA's relatively tepid revenue forecast for the current period. But if in sales would be roughly$54 million for the third quarter versus$47 billion for the second quarter, analysts had hoped there would be 60 billion. Bear in mind, just a little asterisk here, they've had to remove those China. Remember they had that altered chip for China if they removed that?

1:37:17Chuck in China and you're back up to 60. The disappointment didn't last long. NVIDIA bounced back pretty much to its record high. The company's now valued at 4.4 trillion, by far the world's most valuable business. I remember not that long ago when we were saying when's a company worth a trillion and this is 4.4. And just a casual reminder, in March 2020, as COVID was starting, so not that long ago, what do you reckon nvidia was worth march march 2020 just before covid i'm gonna go extreme it's 4.4 trillion now like one or 200 billion 120 billion there you go 36 bagger yeah since covid um so yeah what are your thoughts nvidia so i tell you my peer trade short nvidia long the rest of the market Along the rest of the market?

1:38:07Yeah, like the index. I think whatever the index falls, NVIDIA is going to fall much, much, much more when the crash comes. Why is that your thesis? Because this party can't continue forever on AI chip purchasing. So that has to come to an end. So this is the cat-backs from Microsoft. Yeah, that has to come to an end. And NVIDIA is being priced, firstly, like it's going to continue forever. And then secondly, like, oh my God, this company is amazing. so it's like some multiplier of continuing forever. Where I would disagree with you is I think it's actually priced with a foot in both camps. You reckon?

1:38:43It's got a PE multiple like low 30s. Oh, come on. West Farmers has a higher PE multiple than this business. I don't think their revenue growth is going to slow. I think it's going to be negative. That's why there's a foot in both camps. I think it's going backwards. If you don't think the revenue growth is going to slow, it's cheap. If you think it can just maintain this revenue, it's cheap. Well, I don't think that at all. Which is why it's on a PE of 32 or 33 or whatever. I can't call this a meme stock because... But have you seen what happens when Jensen walks around? How he gets mobbed? He's the Pope, right?

1:39:14Yeah. And so when... He's much more popular than the Pope. Well, when a CEO... Who the hell's the Pope? Right. Well, when a CEO... Well, I think it's like a billion Catholics might disagree with that. The new Pope. No one knows the new Pope. We wouldn't even know his name. What is his name? Pius or something? Pope something. And so... Did you get into the Pope's house? The new Pope. Yeah, new Pope. Pope Leo? Leo. Yeah. There you go. Yeah. The resident religious expert. So the thing is that if you've got a CEO walking around like he's a pope. A celebrity CEO, you could say. But if your CEO is walking around like he's the pope, then your business could be known as a religion.

1:39:49Yeah. And NVIDIA is the new religion. Tesla used to be. I talk about religions. But Tesla trades on a multiple. Tesla makes no money and is worth a trillion. NVIDIA makes a lot of money. But NVIDIA, you have to say, NVIDIA is an investment religion now. That's why it's the most valuable company in the world. No, but it's the most valuable, but it's not the highest multiple, is my point. I understand. It's a relatively cheap multiple. I know, but I think that this religion, I don't think this religion can sustain a crash. The point you're making, I've been making for years, the CapEx spending can't continue forever.

1:40:19And we know whenever businesses over-index on CapEx spending, they inevitably crash and bounce back. So I think it's, where I disagree with you is, I think if NVIDIA crashes, so does, that means Microsoft crash, it means Apple, which is one of the most overpriced businesses in the S &P crashes. It means Meta probably goes down. So you think the overall market will fall more than NVIDIA? Well, probably locksteppy or... I don't know about that. I definitely agree with you that NVIDIA is hugely at risk with its capital stuff. But where I think we probably differ is I think it's actually priced pretty cheaply if you ignore that sort of thing.

1:40:50So that... But you think Tesla is the most overpriced of the magnificence? Well, Tesla's like a joke. We can agree with that. Tesla makes like zero money and it's worth a trillion. But if Tesla hasn't totally collapsed by now, then it might be the Bitcoin stock of this era where nothing can keep it down in a foreseeable future. I think eventually the religiousness of Tesla evaporates. Yeah, but that's how I feel about Bitcoin, but I've been wrong the whole way through. I know, but market stays irrational longer than you stay solvent. So eventually these... Luckily I didn't short it. Proofs can last for 10 years.

1:41:24Yeah, so... Funny point back to Bitcoin, when you think about Bitcoin, I love the notion of digital gold because fiat currency is so bad and so debased but if you look at Bitcoin over the last I think it's the last 10 years was it 10 years? I think maybe the last 6 years what do you reckon Bitcoin has grown in the last 6 years? So when was is that pre-COVID? Around pre-COVID well I don't think like wasn't it like$20 ,000 pre-COVID? Total percentage what do you reckon has grown? 5x? 6x? No it's like 76 % Is it? Yeah Since pre-COVID? Like around that time No, because it boomed in COVID. That's the thing.

1:41:59And then it went back down, then back up. It depends when you start. Yeah. But like, even if it's only gone up 100 % or 76 % or whatever, like that's not what I thought would happen. But it's more the point that Bitcoin actually become a lot more stable. Yes, it's Joe rated. Yes, it's more stable. So it's like, one of my knocks on Bitcoin is it's not stable. I'm actually more pro-Bitcoin now seeing it actually hasn't gone up as much as I thought it had. I'm equally bearish on Bitcoin just because of its underlying. I've still got issues with its underlying. I was going to say, it's the gold issue.

1:42:28Yeah, but you might be right about that. I'm not Matty Deladova. I'm not saying I'm going to run out and buy Bitcoin, but my concern about Bitcoin is as a store of value. You can't have a store of value that jumps up and down 20 % a year. That's true. Now it's becoming more stable. You've got the whole micro strategy issue, which I'm really, really concerned about, because micro strategy is down 15 % this week as well. So that's an interesting canary in the coal mine for Bitcoin. Someone said to me recently, have you seen how expensive it is to buy gold jewelry? I'm like, of course. It's not because of the demand for jewelry.

1:42:55It's the crazy price of gold at the moment. input, right? Yeah. I will say... Well, you say crazy price of gold. Gold hasn't increased much more than the money supply. Money supply's gone up, so gold's gone up. Well, that's actually a great point. That's a great point. And so I think, you know, the thing we didn't talk about now, we're not going to talk about it now, but at some point we'll talk about it is, like these, we touched on stable coins, went a bit quite deep actually, like a few months ago. You know, these stable coins are the emerging story in crypto. If all of these large corporations like Walmart or Amazon, et cetera, start producing their own stable coins, we're just going to be back to an era like, I don't know, six or 700 years ago when there were all these - A hundred currencies.

1:43:36Yeah, a hundred different currencies that were all backed on the basis of the issuer of those currencies on the gold standard at that point in time. But it's a massive back to the future moment if we have these stable coins. Well, you definitely don't think it's a bad thing. You definitely don't think it's a bad thing. Because look at how governments have treated fiat currency. Look at US runs these massive deficits. They're just racking up this bill indefinitely. But back to NVIDIA. I think we're in complete alignment that this capital spending that's powering this huge earnings boom will end.

1:44:04The question is, will it reverse or will it stabilise? Because the price of NVIDIA is actually pretty reasonable if you don't think it's going to crash. Yeah, I agree. If the CapEx spend is going to crash. You know the main reason I want the demand to slow and reverse? Do you want to buy some GPUs? Why? So it becomes cheaper to use AI? No, because I just want to buy a bit of graphics card for playing video games. And the price of them is insane at the moment because all the five series are being sucked down for AI purposes. You've got to start playing Age of Empires, not these fancy games you play and you'll be fine.

1:44:36Well, I don't even think you need a graphics card for Age of Empires. You need a couple of monkeys riding a bike or something and that'll power it. I think we'll probably wrap it up there. This has been a great episode. We both have to run off to do stuff. Thank you, everyone, for listening in. You've got a big week? No, I have a very nice, relaxing week. So we are both in town next week, but usually one of us is away. But next week we have Mike jet-setting around the globe. He's leaving us for Korea. So we look forward to getting Mike's travel log. We'll see if he actually keeps his video and microphone until we can talk to him on the episode.

1:45:04I thought he was not rocking out. Are you going to rock up today? He'll use the old excuse, I'm just turning my video and camera off, but I'm still here. Mike, what do you think about this? He's off to the Korean barbecue. Silence. Radio silence. He's off to watch K-pop demon. I had a technical issue. What was your technical issue? I went to sleep. on that note we will see everybody on Saturday of course for our Ask Us Anything episode thank you again of course to our fabulous sponsors thank you I dear thank you Mark thank you Joel we will see everybody next week