CSL Breaks Up, Canva Deep Dive, Xero Gets Whacked, Step One’s Struggles, RBA Fails Again and the World’s Largest Companies

21:55You're right. The difference is 44 % growth is a lot higher than 20 % growth. And they've been maintaining this for a number of years. Yes. Any other truisms you want to share with us? Blue is bluer than red. How about that? That's a good one. All right. And now we go to Figma. So Figma is much smaller than Canva. Its revenue was only 820 mil. Yeah. Way smaller. Way smaller. Like a third of the size. And its ARR is probably just a bill. So it's starting from - Yeah, a newer business. But its ARR probably is just getting to a bill. And so what that means is that it's trading on like 35 to 40 times trailing revenue.

22:34What's Figma's growth? Figma's growth is almost identical to Canvas. Mid 40s. Yeah. And maybe even a bit higher actually. Close to 50. Yeah. And so, but we can call them like for like in terms of growth. And so Figma is trading on like 40 times ARR. And so it's trading it. The reason I said Canva is cheap, it's - Well, relatively cheap. Yes. It's Figma at 40 times ARR. I think Figma's - Figma's more profitable though. Well, we're going to - So that's why we'll get to that, right? But just on revenue, ARR multiples. If you just look at growth and ignore profitability, well, it's a faux comparison because I can grow my business really fast if I don't care about revenue, if I don't care about profit.

23:13If you just look at growth and not profitability, it might be 2021 or it might be 2025. It's hard to work out, right? We're not speculators. I know, I'm in agreement with you. To get the real story and the real story is I could grow my business at 50 % no problem but I'd be making profit. So we'd say, no, we want to make profit. We want to grow profitability. So let's forget about this profitless growth stuff. Yeah, I agree. And so we're going to get to, I'm going to tell you two metrics that are really good on Figma that we don't know for Canva. Yeah. One of them is net profit margin. I'll talk about that second.

23:48Net, so this is after tax. After tax, yeah. But one of them is a metric that in a way is almost the most important forward-looking metric in software as a service in SaaS, which is net revenue retention. And so I'm going to explain this a little bit slowly because I think it's so important. We've talked about this a couple of weeks. I know. And so I'll just quickly but slowly. As in thoroughly but, you know. So you've got 100 customers. Collectively, those 100 customers are spending a million dollars. Fast forward 12 months. What are those 100 customers spending today? Some of them will have dropped out, so they're spending zero.

24:26Some of them will be spending less, the same or more. You add up all of that group of 100 and what they're spending today and you use that as the numerator and you put that over the denominator. What were they spending 12 months ago? And you get a percentage. That's the net revenue retention. The reason it's called net is because there is also a gross revenue retention. But what gross revenue retention means is how much of the spend that happened last year was retained 12 months later. What that means is that no customer, even if they spend more 12 months later, it can't be more than the dollar value they spent last year.

25:05So 100 % is the maximum. And what's a good gross retention rate? Gross, yeah. What's a good gross retention rate? for a success business? High 80s would be good. And a good net is like what, 120? North of 125. So Figma's 132. So expansion revenue, obviously. That means the customers that were in the business a year ago, after you account for all of the ones that quit and churned out, that pool that was there a year ago is spending one third more this year than they were spending last year. That is a great measure of future growth of a company. It's also a great measure of product market fit, the ability because mostly switching costs well unlike unlike a lot of Atlassian's revenue growth Figma's revenue growth is probably not expansion revenue by charge it's expansion by new products to customers existing customers but it's not price rise revenue and so this you don't have you don't have price rise your way certainly eventually your price it's tough to price rise to 132 % net revenue retention because you'll get a lot more churn off the platform unless you got like obviously Atlassian for example has got amazing switching costs so they've got they can push the price rise a lot But eventually you hit a point where customers go, oh, I'll just do it myself.

26:13Although you sent me a little snippet about overcoming Atlassian's switching costs during the week. The Klarna CEO presented, which was interesting. And he basically left Atlassian behind and provided a pretty deep explanation. And Sebastian doesn't always maybe tell the truth 100%. And we saw with his CS automation, all that kind of stuff. But I think there's no doubt that some of the basics, you'll be able to love a Jura clone, I reckon, in a couple of years pretty easily. Not sooner. And so it might not be 100 % true, but what is true is that you've got the CEO of one of the world's big tech businesses, FinTech, wanting to get off Atlassian.

26:51That's definitely true, right? And so we don't know what Canvas net revenue retention is. It could be 132 % as well. I don't know. It might be. It's a bit tricky with them because - Less expansion revenue, I reckon, for Canberra. Well, they buy stuff and then they roll it out to existing customers. Yeah. And so that's part of net revenue retention as well. Yeah. I just don't see – I know my use is a Canva user, like a small Canva user. And I've got the package and I keep that package. I use it and I need to use it. But I'm not buying other Canva stuff. I'm not expanding. I'm not charging me much more.

27:23I don't even pay. Versus Figma, we regularly buy other stuff because it's really good. So let me talk about net profit and then let me tell you what I think is fundamentally how everyone's missed the point with this comparison. So the net profit margin that Figma generates is 20 % at a billion dollars revenue. Like no one is generating profits at a billion dollars revenue in the software world. If they hit their 1.1 bill of project analyst consensus revenue for this year, they'll have generated$220 million of net profit. I mean, that's very, very unusual for a company of this size. And I think that you're absolutely right.

28:01That is one of the things the market loves. By the way, it still means they're trading on a PE, a forward PE. That means this year, end of year's multiple of net profit of 150. Yeah, growing 50 % though. Yeah, that's true. Growing revenue 50 % or close to it. And also I can just tell you this, it's a bargain because ProMedica trades on 300. So like whenever in this market, whenever you think, my God, that is crazy expensive, you can always find someone more expensive. and so I think and ProMedicus I don't think is the worst by a long way it's much worse than that ProMedicus is a great business Figma's a better business because it's scaled ProMedicus I think is growing even faster than 49 % 39 % so Figma's a better business in every respect that's why it's worth in Australian dollar terms what is it double ProMedicus probably yeah so let's call 33-49 or something like that that's 50 let's call it ProMedicus 30 yeah that's right that's right and so I think the reason that so definitely I understand why people are talking about Figma because it's something you can hang your hat on for a Canva IPO plus Canva's bigger significantly bigger and growing at the same rate and we don't know the NRR comes down to profitability I think Canva's EBITDA margin forget it I'm not going to let them capitalise staff I'm going to put the total cost of staff in I think they could be running they've got to be running at least 10 % EBITDA at least I think it could be 15 % I don't know it depends it's hard to know what they're going to be spending all their money on right but let's say it's 10 % I reckon it's max 10.

29:33You think it's max 10? I've got no justification. Well, that means their trailing EBITDA would be$250 million. And so if you looked at that, their rule of 40 would only – I think their rule of 40 at a moment in time, if you used EBITDA, like American EBITDA all in, and ARR growth, it would only be kind of 55 to 60. I say only, that's huge. But there are – I think that even Life360 might have a high. Yeah, it's super high. So the thing about this business that's amazing, about Canva, is just the scale of it. To have a rule of 40 that's in the vicinity of 60, $3.5 billion of ARR USD, that is remarkable.

30:18We had Atlassian's rule of 40 at sub 20. Obviously, it's hard because there's some question marks over how we treat the share-based comp. but let's assume, take the Adam approach of taking share-based comp out of EBITDA, which I know you argue against, but I'm putting it in, and it's well, because you've got 20 % growth and you're making losses. Well, I do argue against that. I think, well, I don't argue about share-based comp. I think, you're right, I do argue against that, but I don't argue against making sure that you take all the capitalisation of your staff away and fully expense all of your staff into your EBITDA.

30:53I think that's important for a rule of 40. Yeah, Canva's much, much, much, much better business. The thing I really - If you compare the value - Yeah, so compare the value - It's about the same now because I think Alassian's about 45 billion US. Canva's what, 43 did you say? 42. Yeah, so we - And like Alassian might be going in the opposite direction to Canva on valuation. Absolutely. So yeah, I think Canva will become a bigger business. You know, the thing is - By the way, on a rule of - Of course, Mike and Scott own a chunk of Canva. Yes, that's right. She could be worth more than their Atlassian stake.

31:25That's right. Well, I mean, anyone that owns a chunk of Canva is walking around as if they're a genius. And I actually take Mike and Scott out of this because they've built an incredible business. They were actually very helpful. I agree with you, but let's not talk about them because we're not going to doubt their business acumen, right? But there's all these investors that just made an angel investment in Canva or Series A that are walking around as if they're some kind of gurus when basically they just decided that there would be a lottery draw and they would buy tickets. And then for some reason, there were so many big prizes handed out in the lottery.

32:01And so, you know, I'm not begrudging anyone on that. And like a lot of people are quite sanguine about that, right? But it's just a tremendous gain. You know, rule of 40, I wouldn't say it's been replaced because it's still big, but there's this thing there called rule of X. You know about this rule of X? I thought you'd talk about rule of X. Yeah, which is basically if you draw a line and you compare revenue multiples to growth and earnings percentages, what you find is what – I saw this on a Goldman Sachs document. They found the way to work out a number that's a more accurate comparison is to multiply the revenue growth by 2.8 and then add the profit margin to that.

32:38So growth is like 2.8 times profit margin in the current market and that's a better way to kind of compare businesses amongst themselves. So that's interesting. So I just want to finish by saying this is why this whole thing is a bit of on the wrong track. So Figma's not like Canva at all. I didn't really know much about it, but Canva, forget about even the enterprise versus small business. You're right. Like Canva's history is individuals and small business, but they say they've now got 95 % of the Fortune 500 and they've moved heavily into enterprise. I don't know how much that is. Random people from businesses just using Canva.

33:09Well, they say they've signed million dollar deals. They do superficially look the same as Figma because they're about design and they're both targeting enterprise now. But Canva is basically content and presentation creation and Figma is much more about software product development, UX. So they're not really analogous and they're kind of even moving in opposite directions. So I wouldn't compare them. But I tell you, Canva - Maybe they spent the last 20 minutes comparing them. Oh, they're financials. Yes. Well, I am because everyone is, right? But I tell you the problem that Canva has in my view that Figma does not have.

33:44Canva's big competitor at the moment is Adobe, who tried to buy Figma and got knocked back. They should be a bit scared of Adobe, because Adobe makes$800 million of free cash. We know where this is going. Yeah, and they make$800 million of free cash. You saw the Darth Vader theme at this point. Well, coming down the corridor into that theme from Seattle is Microsoft, who is enhancing their Canva killer constantly. Even Adobe is now pumping their 800 mil of profits into effectively building prompt-based creative engines, which is that Leonardo thing that Canva bought. Canva's been doing a good job of that, but no one's doing a great job.

34:22I have to say, if you think that this world, you know, Canva's done a very interesting play where they've created a version of a spreadsheet that's not very functional, but it's really good at creating. I love it, I love that. It creates presentations really easily, right? Yeah, I love it, I love it. Presumably Google is going to try and do something like that as well. Microsoft, but yeah. Well, Google and also Microsoft. I think Microsoft has got a long and storied history of completely destroying competitors by integrating pieces into its platform, even when those pieces are not the best pieces in the market.

34:53Or it's the suite. The suite. If you remember MS Office back in the day, the word processor, Word was not as good as WordPerfect, and Excel was not as good as Lotus 1, 2, 3. And there was VisiCalc as well before that. Yeah, VisiCalc. Do you remember which product they bought? The only one they bought? PowerPoint. Quiet episode. One of the very earlier quiet episodes. And so I think the fundamental difference between Canva and Figma, more than anything else at a commercial strategic level, is that I think Figma is a relatively niche player and will have largely unencumbered growth available to them for quite a while.

35:26And Canva is about to fight against trillion-dollar businesses and that is going to be a real fight for them to have. And they're too expensive to buy, but maybe I'm wrong about that. What are Canva's powers? Well, brand is definitely a power that they've got. The question is, is there - On top of brand, clearly brand. Yeah, but when I say brand, like it's not many companies have genuine brand. I think when I tell people - Well, CAC reduction there. Yeah, when I tell people like Canva's an Australian business, people all over the world are shocked. Like they don't know it's Australian, but they certainly have heard of Canva.

35:54Yeah. Then the question is - It was counterposition against Adobe originally, but that's kind of gone now. Yeah, but it's doing the same thing. Yeah, their counterposition's over. And so the question is, do they have scale? Do they have switching costs? do they have network effects? So network effects would have to be when I use Canva and you're already on Canva, I can share stuff with you? No, because you don't need Canva for that. I can share. Well, let me, so let me just, I'm going to try and make a devil's advocate argument to you. If I'm in an organisation and I'm using Canva, then the person next to me uses Canva, and then I say to the manager, go on Canva and we'll share the designs, then the next person in the organisation, if they want to be a part of it, needs to be on Canva.

36:34That's right, but I don't think that actually happens. Well, I don't know. I don't use Canva. So they PDF it to you? Yeah, exactly. So probably no on that? Network effect is very, very hard. It's very mild, mild network effect. Scale? Well, they're fighting against bigger companies than themselves. Like when they go and buy Leonardo and stuff like that, they're fighting to compete with these bigger companies. I'm not sure what scale economies would they have. I can't see anything. Well, what's your scale economy against Microsoft? Like, forget about it, right? Like, there's no scale. Well, you've got no suite, which is a classic example of scale.

37:06Yeah, well, they've got the negative power of scale against their competitors. Microsoft's got scale on that edge. That's right. So where Microsoft's scale economies kicks in is, I've already got you, I've already selling you PowerPoint and Word and Excel. I'm going to sell you the Canva thing as well. So I think both Adobe and Microsoft have switching costs because of their platforms. Massive switching costs. You agree, right? Even Adobe does, right? Microsoft especially. Microsoft's got the mother of all switches. Like the operating system. Like you can't. Yeah. And so, and then what's left?

37:34What's left? Process power, no. Nothing. They've got nothing. They've got brand. You know what they've got? What you might want to call the incumbency advantage. There's some operational excellence in there, but that's not a power. Yeah, they've got an incumbency advantage. People are used to their product. That's switching costs. And used to using it. Yeah, but it's the thinnest layer of, it's the veneer of switching costs. There actually is. There is some switching costs in that you've got all your history in there. There's a little bit, and you're already using them. It's not that expensive.

38:00I think that's probably their second best power is switching costs so you know what they've got problems I think they've got problems you said they were undervalued at 60 billion dollars so I think what's going to determine what's going to determine their valuation is how fast they get to market and that might not be a good thing like if they go and they end up to be worth 100 billion USD after day one which could definitely happen I think that's going to be an albatross around their neck right like basically that's going to stick it's always an albatross yeah yeah the only powers that Lassian has is Brandon's switching costs they've got nothing else and they're built a very, well, temporary system.

38:33And now everyone just talks about how a lesson used to be worth twice as much, right? Like that's the albatross, right? Yeah. So that's tricky. Anyway, I thought that was very fun, my little foray. I mean, not for you, but for me it was fun to go and look at all of these little things. Can I do a quick quiz? I wrote that article in Smart Company. Smart Company, I mean, they actually did pay me, funnily enough, which is very weird to get paid for writing an article for them. They say this from the heart. They're lovely to deal with and also in a time when so many of the major newspapers and media that cover tech kind of publish different versions of the same story.

39:07They have genuinely unique differentiated content. Smart company. Yeah. I think Jason Andrews stuff is really good. Yeah, it's really good. I've got a quick quiz for you. Yeah, go on. We've asked before. I'll refresh the quiz. Largest companies in the world. God. Can you guess the top 10? Well, aren't they all Chinese? We just don't know about them. They're not all Chinese. Well, they are, but you just don't know about them. Actually, Chinese aren't in the top. The largest company in the world by far is the Kremlin. Largest Chinese company. I'll do a quiz within a quiz. Largest Chinese company.

39:38Alibaba's got to be up there. No, that's not. Isn't it? It's the fifth largest Chinese company. Is Tencent up there? Tencent number one. Oh, that's what I wanted to say. Clearly, Mike is the business genius behind this podcast. Nah, he's right. He's got me on that one. I just find it hard to remember which is which with these Chinese businesses. Tencent was number 17 globally. What about - Alibaba was number 36 globally. ICBC Bank is 25 globally. I don't even know where we're up to now. I'm still feeling terrible about the Tencent. Current largest business. I was thinking about what's the name of the one that Yahoo owned and I just couldn't remember the name of it.

40:10That was Alibaba, wasn't it? That's what I thought. I get very confused. Which one's Tencent? Tencent's the WeChat. WeChat, okay. And a bunch of video games as well, don't they? Oh, they're the ones that own Epic. You're Epic Bank. I've got to try and remember. Because I don't know. You know, Tencent is not their real name, basically. Do you remember who owned Tencent? Who owned it? As an investor in Tencent. NASPERS, the South African investment company. Or not, but the South African e-commerce business that made hundreds of billions on Tencent. Number one company in the world currently, because this flips and flops all the time.

40:40Is it not NVIDIA? NVIDIA, number one, 4.2. All right. Number two? Who would be number two? Microsoft. Microsoft, 3.8. Number three? Apple. Apple. Apple. Can you guess the market? Remember, Apple was number one not long ago. Like, as in months ago. What was Microsoft? 3.8. 2.3. No, 3.1. So Apple's gone from number one to number three, but down by a trillion. So that's a big drop-off. I don't know who's in fourth spot. Is Netflix in fourth spot? No, they're much smaller, right? They're like 500 mil or something. 514 billion, yeah. Amazon, number four. Number six is Meta. Who's number seven? Tell me the biggest non-tech one.

41:14Saudi Aramco. Oh, there you go. But no free float. That's 1.6 at number seven. Number eight is Broadcom. Number nine. TSMC. TSMC, number nine. and number 10 is oh number 10 ridiculous yes as in ridiculous that I'm not going to know it or ridiculous that it's there ridiculous that it's there that should give it away how does that give it away that could be in it that luxury escapes that's true I mean that would be amazing at number 10 equally ridiculous as this business really yes I don't know what is it Tesla I've got a quick thing to touch on yeah before you want to talk about something bigger presumably I do I want to quickly touch on the Matt Common's surcharge comments before we go.

41:55No, go on. Tell your surcharge comments. We've talked about this a couple of times because it's a pretty big issue in Australia that the RBA planning to not allow credit card surcharges. And last week, remember, we talked about Matt Common having a go at the RBA, actually being the only bank having a go at the RBA, effectively saying that it will damage customers, et cetera, et cetera, and you won't be able to have points anymore. And the RBA, which is having an absolute mayor over a couple of months, came out and said that Matt was wrong and that you cannot use loyalty points to underpin exchange rate fees.

42:26Central Bank said it was not appropriate for small business subsidised customers who use credit cards with generous frequent flyer points attached. The RBA said if banks decide to attach frequent flyer points to encourage spending, these should be funded from other pools of revenue and recouped from card fees and interest rates not regulated by the RBA. And the fees, things they can charge apparently according to the RBA were authorisation, transaction, processing fees, fraud, costs to robot wallet providers such as Apple and fees paid to card networks. So the pitch is basically saying, if you want to do frequent flyer points, don't make us pass laws to subsidise it.

42:58What's the problem with the RBA's views here? There's a pretty obvious problem here. Well, I think there's many problems to these. What's the really obvious one? One is, well, I think one view is when they say, don't do it as things that the RBA is in charge of or regulates. Who knew they even regulated this? Like, basically, they can regulate whatever part of the banking, they can pitch for regulating whatever part of the banking system they want. Well, that's part. The biggest problem is, you think the RBA, this is the... But why are they getting involved in commercial decision-making for banks?

43:25Well, that's what the RBA does in setting interest rates. But leaving aside the fact that we have this Soviet-style money-cost-setting decision, the RBA is responsible for setting the price of money. They don't understand that money is fungible, that you can take a fee from here or a fee from there. Commonwealth Bank is being honest and saying, yeah, it's funding credit card fees. So, okay, we'll just charge a higher fee there and that's where that fee's coming from. Money is money. It flows. I think they do. I think actually they understand that. They're just being a bit disingenuous by saying, do it in areas that we don't regulate.

43:53But the thing is they can regulate whatever they want. Effectively, the government gives them the power to regulate stuff. And so this particular area that they're regulating is something that they're regulating now and they've made a decision on now. But who's to say they won't make a decision on some of these other things down the track? And I think fundamentally, I think the frequent flyer points argument was a loser argument, as in not that he's a loser, but that argument's not a winner, right? Because it's too easy for the RBA to say, you're basically trying to get us to pass regulation that makes the average punter pay for frequent flyer points or small business pay for frequent flyer points that you're using on other customers to try and increase their spend.

44:35It's too easy to shoot that argument down. I don't think it's – but I think the RBA shooting it down is wrong. I think they shot it down. They missed the plane completely. Well, if you raise an argument, then people – if you're in a battle against an adversary and you raise an argument, like a polemic to argue against them, then they're going to argue back against whatever you've raised. This was the wrong thing to raise. I think there are better arguments against this, one of which is how about you let markets just do what they do. Customers are more than happy paying a fee. Let them pay a fee if they want to use it.

45:04They can use debit card if they don't want to pay a fee would be the obvious response. It just showed the RBA is – is there a more out-of-touch organisation in Australia than the RBA? They spent a billion and a half on their ridiculous head office in Martin Place. The Victorian government, the federal government. No, the federal government's not as bad as the RBA. I think RBA is far worse. They're on par with maybe the Victorian government, which is saying how bad they are. I reckon, I don't know. You're much more dramatic about this than I am, but I definitely think, you know, this idea, basically Australia doesn't know the relationship that regulators and government want to have with the banking sector.

45:36So we've got these four banks, the entire economy and the big four banks are inextricably connected. Whichever one goes down, it all goes down. They drag each other. If the housing markets go down, the banks go down. If the banks go down, the housing market goes down. And so politicians love bashing the banks for being too profitable because there's a big number because they've got a massive pool of assets. Of course there's going to be a big profit number. I think the crazy thing is that really in this country, We are best served by the banks being strong because the minute they're not strong, this economy's got very deep problems.

46:16And I just think it's probably a very dumb thing for governments to do to try and get political mileage out of bashing banks because they might succeed one day and they might turn people against the banks and then it'll destabilise the whole economy. The taxpayers have to bankroll them anyway. So it becomes a bit of a... Right, when people say, oh, we're giving you a$100 ,000 guarantee on your bank account, So effectively, the tax,$250 ,000, it's the taxpayer guarantee. Of course it's the taxpayer. Of course it's the taxpayer. So I think that's the main problem is that the governments are not honest about how they really feel about the big four banks in Australia, which is we need them to be strong and solvent and successful because they are underpinning the entire economy.

46:57And that's why I say to you, when they prop up house prices, and you jump up and down and say, but they're just propping up house prices. And I always say to you, yeah, because they're pretty concerned about the solvency of the big four banks. that's why they're propping up house prices. That's probably a bigger talk show. So just a quick touch on a bit of a – I reckon this is a bit of a mea culpa for me. You're obsessed with this business. Well, I'll tell you why I'm obsessed with this business and then I'm going to dig an even deeper hole for myself, possibly for future. It's step one. It sells underwear.

47:27You wear their underwear. You don't have to prove it to me now. It's fine. We're videotaping this episode. It's fine. I mean, is that going to get us clicks or not? I would have got a huge number. That's a huge, huge, huge standing up and showing me the Step 1s. Is that going to be a YouTube short? I'm actually wearing Calvin Klein's that, I think. There you go. There you go. Which is possibly one of Step 1's challenges. Well, I looked at Step 1 and I said, this is a very undervalued business. Great growth. Great free cash generation. Very profitable. Not very expensive. Have they reported? They just reported, yeah.

47:58And you agreed. And we were right about that for like a year and a half. Yeah. And then I looked at their results last time. and I'm like, I think, you know. Six months ago. Yeah, slow and steady should do it. Yeah. We were worried about the female one. I was worried about whether they could get product market fits on female underwear, effectively, because it's so different to male underwear. But look, I wasn't very worried and I thought, like, they're still pretty cheap. Yeah. Anyway, they gave a little bit of a hint of how their results were going to go and it wasn't great. That's right, I had that announcement.

48:35And then they put out their results and they were even worse than what I asked. So I wrote this kind of thing before I left LinkedIn. I wrote this thing, which is, you know, I basically wrote this thing and I said, this is my prediction of step one's results. And I was largely right. I said, this is good case, middle case, worst case. And they actually got pretty close to my worst case. And essentially what has happened with them is the Australian business is not really growing. the Australian men's business. I thought that was going to be an issue, but I also thought it should grow a bit. I mean, it grew like 3 % the revenue, which is disastrous.

49:14The problem is, like I thought this was just going to maybe be a bit tied to the economic environment or whatever it might be. The problem is that, and so I knew their gross margin would go backwards because they're discounting to try and get volume. And sure enough, the gross margin did go backwards. But the problem that I saw with this business is that Australia is not firing and the gross margin went backwards. And then I was sure they would keep their fixed costs stable. They added a ton to their fixed costs, which is very, that's worrying to me about how they're running the business. Then the women's stuff predictably did not fire.

49:50And I noticed that the repeat purchasing slide seems to have disappeared from their deck, which is always a lot of bells. And I might be wrong about that, but I'm sure I saw repeat purchasing last time. I was waiting for that slide. because I'm like, let's see what the repeat purchase rate is. I think it's safely safe. It's not there as bad. Yeah, they're not publicising it. It's bad. And so women's stuff really, I think that is alarm bells on the women's stuff. I knew that international wasn't going to be good. The US business basically ceased to exist. Yeah. And the way they framed it is it's going to be a long-term strategy.

50:22I think they went from like 8 mil of revenue to 2 mil or 3 mil. That great Simpsons episode where Homer buys that car from like the Czech Republic or whatever. And he goes, where's his car coming? It no longer exists. and it's uh it instead of a on the gear stick it's got h and the guy goes just put it in h she'll go 300 hectares on a single tank of kerosene what country is this car from it no longer exists but take her for a test drive put it in h that's fantastic right that was classic that's golden simpsons era and so So the women's stuff, yeah, it's a disaster. The US is a disaster. The UK is not really growing.

51:08And you look at all of the - This is a business firing on zero cylinders, basically. Yeah, I mean, it looks really bad. Especially Fred Flintstone using his legs to fire this car. Well, I think what's interesting is it's kind of an insight into what powers businesses to be successful. And none of these things are powering this business to be successful. It has less cash in the bank because all of its money is tied up in stock because its stock is not moving. It's still paying. It's got 33 mil of cash, still pays out$4 or$5 million as a dividend because obviously people want to get paid. And I would not be paying out a cent if I had this business today.

51:39And this is the biggest question that I didn't understand. I just thought their repeats were going to be terrible, but then you would be fine, the new percentage. Then the number of new customers, the percentage of new customers really fell. And then I looked at the average, the marketing spend as a percentage of revenue and actually went down. Like the CAC went down. And my question is, if you're struggling to get well is it because like i know it looks good but i'll come to you with a problem and i say to you we're struggling to get new customers and you say we really needed new customers get the new customers in the in the pipeline and i say all right and then you say to me how about cac can you afford to spend more on cac and i say well cac is down compared to what it's last year isn't your next comment going to be well go and is it you might say to me if you Spend more on CAC.

52:26Is it still going to be a profitable sale? And I'll say, yeah, sure. Our margins are really good. Isn't your next comment, go and spend more marketing dollars driving new sales? Why the hell are they not spending more marketing dollars? It feels like a conscious choice. You don't drop CAC in this situation without consciously spending less on marketing. Yeah, but like I think - You're saying strategically that's the wrong call. I'd rather spend less on fixed costs. Oh, clearly. And so at the moment, this business, and so the reason we're talking about a not even$100 million foundation business, not anymore.

52:54No,$110 million. Oh, because EV, because, no, no, because, no, I think it's dropped below 100. No, I just checked that out. All right, so the reason that I'm talking about it is because it is now, once you take out their 33, 30-odd mil of cash, it's now trading at like four times profit before tax. Profit before tax. Yeah, something like that. And plus you get$25 million of stock for free as part of the deal. If you came to me and you said to me, you can buy this business on private markets at four times profit before tax and I'll throw in 20 plus million dollars of free stock. I would say, where do I sign?

53:35Because I would be confident I can probably turn this around and get some growth back into the business again. The fact is that the market completely hates this. You've got Temple and Webstar. I know I'm going to harp on about this. You've got Temple and Webstar. All right, they're growing at 20%. All right, they've got 600 mil of revenue. but they're making basically significantly less NPAT than this business, more free cash flow. That's trading at$3 billion. It feels like$3 trillion. Not much of a difference. I mean, and then you've got this business, which still throws off$12 million of profit, like NPAT.

54:11Yeah. And basically nobody has got the slightest interest in this business. You just don't get coverage. That's right. forget about you and even we're barely talking about it. They should buy it off, they should privatise. Oh, totally. Speaking of Temple, did you see an announcement a couple of days ago? I saw that the CEO sold a tiny percentage of his stock for a very large number of dollars. You said tiny. 15%. 20%. I thought that 20%. No, I think, didn't he say he kept, it represented 13 % of his stock or something? I thought it was more of it. Yeah. I think him and the other, what's the other guy's job?

54:45Conrad? Yeah. these are not founders or they're founders no founders founders so they sold I think 2 million shares between them or something like that and that would be worth 50 million dollars circa yeah about 25 25 each give or take yeah I think I think Conrad sold fewer yeah and they are very smart and they should keep selling 100 % like clearly we know the Temple guys listen to the show I think they've been taking our advice and this is there's no criticism for me in selling like I'd be selling every share I could if I was in that situation so there's not a criticism in any way. They waited till results came out.

55:18They let the market bid the price up or down as it has. And they clearly agree with us, thinking this is one of the most ever-valued stocks in the world. Mark Coulter, you're a very good operator. You're even much better at investor relations. Keep selling your stock ASAP. I'll be selling everything that's not battened down. On that note, congratulations to the Temple guys for listening to the show and shrewdly selling down. We'll jump to a quick break and be back with a couple of really big stories after this. In today's digital landscape, proving your security commitment isn't just important.

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57:18And we're back. And one of Australia's best performing businesses, CSL, was last week smashed after announcing it would spin off its US vaccine business and cut 3 ,000 jobs. The market reacted horribly to the news, amongst other things, sending CSL shares plunging 17 % in a single session and wiping a lazy$20 billion off its market value. Do you remember what CSL stands for? Commonwealth Serum Laboratories. Correct. Do you remember what it was floated? When? Yes. I'm going to say 96. Close. 94 in that flurry of floats by the Kennedy government. That's right. I think Commonwealth Bank was the same year.

57:55That's right. Telstra was similar as well. Do you remember what its value was when it floated? I've got no idea. I'm going to guess because I remember them at$100. I reckon the float for it was$5 or something like that. As in market cap? No, I have 120 mil or something. 290 mil. Okay. I remember it was a very small number. It hit 140 billion in 2020. Lazy 420 bagger plus dividends on top of that. I mean, in fairness, it bought its biggest current business. So we'll get back to that. But that's something to – Which is the placement business? Yeah, which is bearing. Yeah, bearing. We haven't bought just after the GFC, right?

58:31It was around that – I think they've owned it for 20 years. I think they bought it before the GFC. The reaction to last week's announcement appears somewhat over the top with investors being freaked out by the company, missing revenue expectations and uncertainty surrounding the vaccine spinoff. Are you going to say that they still grew their revenue and grew their profitability? I'm getting to that. All right, all right. I'm getting to that. Because I couldn't work out what this big sell-off was for. Was it for missing, growing well but missing consensus? Was it because people hated the spinoff?

58:57I think it's all three. There's that and the third thing is missed expectations, which is probably the biggest one. The AFR know that vaccines have been part of the business since the 1940s and accounted for about 14 % of its global revenue. So this vaccine's been off is actually pretty immaterial when you think about it. Well, I'm going to talk about it in more detail. Absolutely. I don't think it's immaterial. Yeah, well, 14%. Well, I think, maybe I'm wrong about this, but I think, am I allowed to talk yet or you want to keep saying it? Oh, you can talk me out. I don't know. I don't want to get in trouble or whatever.

59:24It is a podcast edition. No, I know. I'm nervous because if I talk out of turn, you know what's going to happen? When has he ever stopped talking before? You know what's going to happen?

59:34I don't want any more lists. What are the top five things that you talk through where you should have stayed silent? I don't know. I'm not good at least 10 cent. That'd be my first guess. So they've got three businesses. This is a simple and complicated business. It's simple to understand it's three divisions. It's very complicated to understand what they make and what it's for. But they've basically got a division that pulls stuff out of plasma, which is the liquid in blood. I'm going to simplify it as saying. And then they've got a business that does, makes things for people predominantly with chronic renal failure, chronic kidney disease.

1:00:09Is that the legacy business? No, that's... What's the legacy business? I think the legacy business is hidden inside Plasma and they bought the bigger competitor. Like, they built that up. Yeah. And then they've got a third business, which is vaccines. The Plasma business is, like, Plasma and the kidney disease business, these are for, I just call them rare diseases predominantly. Like what they're pulling out of the plasma is stuff like immunoglobulins that are for lots of autoimmune diseases and like albumin and a whole lot of other stuff. Some things are for like, I think there's a haemophilia treatment that they've got in there.

1:00:47There's all very arcane stuff. Like I can barely remember what these diseases are. One of them I think is like autoimmune, I don't know, thrombopenic, whatever. It's all these weird autoimmune diseases, Kawasaki's disease, which is some vasculitis or something. These are really pretty obscure diseases, and they dominate the market for that. The kidney stuff is basically iron and pulling out other things that you don't want too much of when you're on dialysis and those types of things. And then the vaccines business is all sorts of vaccines that they make. And the first two businesses are not the same, but they've got some similarities.

1:01:24like they tend to sell to the same type of customer in the healthcare system. And they're both predominantly focused on rarer types of diseases. And the vaccines business has completely different economics. But my recollection of this, I might be wrong, but I reckon like half the revenue, or probably more, probably six, two thirds of the revenue is the plasma business. And the other two businesses are about split the other third between them. So a sixth wage. 100 % is the vaccine. Yeah, that's about right. But the margins on the plasma business are much worse than the margins on the other two businesses because it's expensive to run all these plasma collection centres, which is like blood collection centres, and also like spinning out the plasma to get all of these kind of components of it.

1:02:12That's also a pretty expensive process. So I don't think it's immaterial, this vaccines business. I personally think it makes a lot of sense to spin it out, but I think it's generating a billion dollars of operating profit. So it's not inconsequential for their business. Yeah. I think it's a business that makes, what, $3 billion US profit or something like that. So they've got$5 billion Aussie. Yeah, I think it could even be a bit more than that, but probably you're about right. So our well-known investor, Jean Baylou, who leads that portfolio at 10 cap, was critical of the spinoff, claiming for CSL to restructure the business is almost a sign things are not working.

1:02:44The result was pretty disappointing. It seems like the core business is not really growing in the second half. Once you split it, I'm not sure the natural demand for a vaccine business that hasn't had its challenges and the US has a fair bit of regulatory issues, obviously referring to the JFK, MAGA, RFK, I should say. JFK's got his own issues. I just want to point that out. I mean, in fairness, his issues aren't getting worse. True. As you said, what's been forgotten about this is the actual business actually performed okay. Revenue was up 5 % and profit was up 14%, which a lot of businesses would have to kill for.

1:03:13Expanding margins, right? So it's a really weird one. This is a business that the market loved for literally 28 years and now the market seems to just hate and how quickly it's just turned on this business. Well, I tell you why these businesses are different. So this plasma business, I think it was a Swiss company, Bering. I think there was a Z in their name originally. It was Swiss. Yeah, I remember that. And so this is a good business because the stuff that you get out of plasma, especially immunoglobulins, which are antibodies basically, they are becoming better and better and better for more and more treatments.

1:03:52So that is a great space to be in. I haven't looked at the numbers. I think you'll find that that Bering business probably grew significantly more than 10 % in its revenue. You're right. It was 2004 they bought it. 2004, yeah. I think that's a really strong business. It probably grew a bit less than people were expecting, but that's a good business. Yeah. And it's quite predictable, that business. And I would say they're the biggest or second biggest plasma business in the world, CSL. And what they paid for that business? No, I don't. 1.3 billion all right so what an acquisition yeah that was a brian mcnamee was ceo yeah well he was a chairman yeah and so and then you've got this um kind of kidney disease business and that also is like they're mostly synthetic compounds they're not taken from plasma it's totally different but that also is a relatively predictable business you've got a patient cohort i think they come to treatment centers for dialysis type stuff and like that's predictable and the problem with this vaccines business is a very capital intensive business like making vaccines is the facilities are very expensive to make vaccines in who are your customers predominantly governments so that's a nightmare it's lumpy and i think their problem if i'm not wrong is that this year as you said with the whole connected to the rfk i think americans didn't really get the flu vaccine this year and so they have these really lumpy unpredictable earnings and i think they are sick of owning a business that is capital intensive with lumpy financials and they just want to get rid of it they said i read this they said it's going to cost them 750 million dollars to get rid of it but they'll save 600 million dollars a year after they get rid of it the 750 that's for sure going to cost them at least that the 600 maybe it will be saved maybe not yeah i think they're also doing a 750 million dollar buyback just to sweeten the whole thing but i don't i don't i know some analysts like it's going to be hard to get rid of it because it's very integrated into their business but i generally think it's not unwise to spin this off i'm not sure they're gonna i'm they might just in specie distribute the shares to csl shareholders yeah um and they might even retain some company-owned stake some strategic stake of 30 i think it's good this is one of australia is really really good at health tech csl cochlear resmed resmed i was gonna say it's a sleep apnea business resmed like we're really good at health tech businesses csl is one of australia's best businesses one of the great stories like 100 100 plus billion from 294 million yeah and so i think though their returns over the last 10 years haven't been great on a share price it's kind of been pretty pretty flat yeah since back to me almost but um i don't really under And like, you know, the markets are a funny place at the moment.

1:06:42Like this was the biggest single day loss that the share price has ever had. Yeah. And like they've effectively said to the market, we did a bit worse than you thought we were going to do, but we still widened the jaws of our profitability and generated tons of money. And we're going to spin off this thing that you may agree with and may not. And in the process, we're going to save a lot of money and we're even going to buy back your shares. And like people hated it. So I'm sure that there are reasons that people hated it, but I think that this will continue to be one of Australia's great businesses for a long time.

1:07:13It's such a bifuricated market where some things are so overvalued and other things are just getting slammed for minimal justification. This is the perfect example of that. I think the margins on this plasma business, the gross margins are like 50%. You lose 50 % in the cost of actually making all this stuff but it's still pretty good 50%. And I mean, this is like its own version of a DTC business. Like they own the whole supply chain. They're just not the ones delivering the treatment at the end. So maybe it's not a DTC. They collect the stuff, make it, package it, and sell it down the line. So I take that back.

1:07:46It's not. But they're getting 50 % margins. I think that if you overthink this business, it's a mistake. I think you should just think about this business and say, it's not very expensive. It's going to keep being one of the great Australian businesses. I actually think the market has overdone their response to this. I 100 % agree on both. Charlie Munger all over this. Great business. Great power. like incredible powers and feel like this business at 22 or west farmers at 33 times like how could you buy west farmers over this like it makes no sense and it's not a cornered resource because their competitors sell the same thing but it's a very high a very deep moat for new competitors to come in like you basically have economy well you can't start a plasma business today it's not going to happen right yeah maybe that's scale economies and like so i think they've got this business has got genuine powers yeah and also you know one of the things that has is like there are these switching costs in the form of long-term contracts with health care providers and so yeah massive switching costs and like the the tailwind because you know no one talks about i mean i guess i guess um hamilton helmer does talk about this because he says the powers are the bits that the business can control increasing your market share and increasing your margins but the other important part of things is the tam and the growth rate of the market and healthcare, and especially this end of healthcare, this is a good tailwind for a business.

1:09:06Yeah, and I agree. I agree with the spin-off as well. I think the market got this one wrong. Let's move on. An Australia's most lavishly paid CEO. Do you know who I'm talking about? Presumably it's the zero CEO. Sukhinder Singh Cassidy is finally facing some investor backlash against her absurdly high remuneration. Pretty much every proxy advisor recommended shareholders vote against the company's remuneration report and vote against they did, with almost 48 % of shareholders voting down the non-binding remuneration report. The former startup exec is being paid target room of$23 million a year alongside that massive one-off options grant.

1:09:43Is that$23 million? Are you doing USD? USD. Yeah. And she had that$40 million one-off option. How many Aussie pesos? Is that$40 million? That's the one-off grant. Yeah. And probably strangely, this whole thing was set by the very respected David Thodey, who's chairman of this business. A very smart, kind and respected David Thodey. Until this week, maybe. Sure, he's still smart and kind, but maybe a bit less respected after this. ISS stated that the vote should send a signal to the board over what it called problematic pay practices out of line with the Australian market. Well, you can't argue with that.

1:10:17Yeah. Glass Lewis said it viewed the big increase in CIO's pay as reasonable, It's reasonable, but objected to the board's decision to grant a one-off$575 ,000 options that best in equal tranches over three years. Options granted at the money with a fixed excise price of$171. Xero said the one-off grant was designed to lift St. Cassidy's stake in the company to 1 % and will generate no value until the share price increases beyond$171, of which you're currently. Well, I find Glass-Lewis and Ownership Matters to both be very reasonable, generally speaking. Ownership Matters also recommended against Xero.

1:10:49Yeah, I think, yeah. Xero had somewhat bizarre events against the large S. They claimed, we do not believe this is appropriate criticism. Zero is very clear that our principal remuneration considers location, criticality, and performance. And given our CEO is based in the US, this means we benchmark against US-based peers. Adee, what's the problem with that comment? Well, by the way, I do want to say, if you want... Where's she based? She's based in the States. Okay. I think she was there before. I am more sympathetic to that, because I face some of the same problems with Catapult. Like, I have to compete against...

1:11:20Are you paying$40 million grants to your CEO? I'm sure you can work that out. Or you can look at our remuneration report. I think the answer is no. Yeah. Nowhere near, right? Yeah. We wouldn't even pay one-tenth of that. Yeah. 1.2 bill USD of revenue. So that's like 10 times Catapult's revenue. Yeah. And she's getting paid more than 10 times the Catapult's CEO. That means the CEO of Microsoft's getting$50 billion a year. So if you said to me, what do you think's going on here? I'll tell you what I think Xero has decided. They're very expensive, Xero. You agree with that? As in the share price?

1:11:56Yeah, yeah. It's very expensive. You actually answered my question as to why the US comment was so ridiculous. Oh, yeah. I already forgot about that. What was the question? Well, David Thode and Xero basically said, oh, paraphrasing, we're comparing to US companies, so that's why we're paying US-style remuneration. Oh, well, I think we might disagree on this because I said to you, I have to do the same thing for Catapult. and you said, you don't pay as much. So I think I directionally agree. My number's just smaller. No, but your difference in Catapult, are your numbers smaller? But Catapult has a majority of your revenue is US-based, right?

1:12:28Oh, well, that's a great point. Like we're not in a, I think a few percent of our revenue comes from Australia. And what percentage is US? Well, this is, zero has consistently failed to crack the US market. I'll tell you the answer in a second. Three? No, what's Catapult's US revenue? 50 % probably? More than 50. Yeah, so you're a US business and you just happen to be here and it's just none of those things. Zero is not a US. There you go. Twice as good as what I thought. Actually, 30 % UK. More UK business. 50 % Australia. So zero is not in any way. So this is not saying, I work at Luxury Scopes.

1:12:57I move to the US. Just give me$50 million. I'll give you my devil's advocate. It's the most ridiculous thing I've ever heard. So my devil's advocate, let's argue about this. So my devil's advocate position on this is, there's not much more we can make out of Australia. I'm talking about zero. There's not much more we can make. We just talked about expansion. We've been in a few minutes. There's heaps of expansion. We're touching the side of the market in terms of customer number. No, I think there's room to go. They're not going to have 100 % of the market and they've got a very large proportion of us.

1:13:22There's a lot of people who aren't using any, they're using pen and paper and all that kind of stuff still. There's definitely, there's heaps of expansion. You know, they're very, they're store, so this is what I think is going on. Look, I agree with you 100 % that this is an Australian business and so the argument is much less valid. I think this is what's going on and maybe this is some justification. By the way, I don't think there's any justification for these numbers. Let me just be crystal clear about that, okay? And the terms as well, which is why the proxy advisors hated it because it's tenure-based.

1:13:51It's not you, this is the big rant. It's not like you based on TSR plus a premium. Is it only tenure-based? The big one's tenure-based. I don't like that at all. That's part of a fixed pay. Basically, if I don't quit, you don't fine me and I don't die. And maybe she can die and still get the money. Yeah, it's like tens of millions of dollars a year. Yeah, I don't support that in any way. I think many, many years ago, a very smart person said to me, the number one way we ended up with shareholders on our register as a private company that caused us problems is all of our um long-term incentives were tenure-based only and i learned that lesson and that's over i never went down that road and so i say tenure-based for like mid-level employee or whatever is probably i don't even like that no but like you can't control like if you're heading up a call center or whatever yeah you can't control how much the business is making so But there's other metrics that you could use.

1:14:45Use personal metrics. Yeah, you could, but more if you want to give someone… Use objective metrics from the call centre. Yeah, but if you're giving someone a small… If you want to try and retain someone and align them with the business, and they're getting$20 ,000 in LTIs, well, that's a bit… That would be a bit different. That would be to say we're going to pay you a$100 ,000 package of which$20 ,000 is going to be paid in stock. That's a base. That's not a performance incentive. Yeah, sure, sure. And so I've got no issue with that. That's fine. But I'll tell you what I think Xero has decided.

1:15:13I could be wrong about this. It's totally speculation, but maybe this is what I would be thinking if I was in this seat. We're very expensive and we can't justify this valuation on our Australian business. And I don't think the Australian business is going to be very exciting in the next three or four years. And so we've got this UK business, so we'll keep expanding that. Which is good. Which is good. But really, if we're going to justify this valuation, let alone triple the valuation, we've got to nail the US. And so let's go and nail the US. So how should we nail the US? Number one, let's get a really proven performer and base them in the US.

1:15:47There's a real question. That's her as well. Well, I'm just telling you the thought process. Let's get a really proven performer and base them in the US so that the center of gravity of the business shifts to the US. I agree that is the way to grow into the US if you're really serious about growing into the US. So that's number one that they've decided. Then the second thing they've said is let's make a high risk, potentially game changer, potentially disastrous acquisition that might supercharge our ability to grow in the US. Well, guess what? This is the ridiculous pay lending thing. They made that acquisition.

1:16:25Yeah. And so in order to get her in the US, obviously, I don't know who is negotiating for her, but at the very least, if she's negotiating herself, she is a great negotiator. and she's got a patsy for an she's going to the age and this like can we talk about David Thodey being this great CEO of Telstra who did a great job at Telstra apparently well I think he did do a great job at Telstra someone has lost the plot at this business this is batshit crazy this is the dumbest rent plan I've seen in decades this is Sol Trajillo the peak of Telstra this is Sol Trajillo style batshit crazy rent should we should I tell you it's unjustifiable okay this is the devil's advocate thing so they do 1.2 bill USD for revenue some whatever, that 500 mil EBITDA is Australian?

1:17:10Are you Australian? It's a bullshit number. 300 million. Because it's 300 million capex in there. What's their profit? 300 million, roughly. So they've got a business doing 300 mil of profit. It's not exactly that, but call that. Whatever it is, a few hundred million dollars of profit, they want it to be a billion dollars. It needs to be more than a billion to justify this vowel. Let's just say a billion, okay? And so, no, what did you say they're worth 25? 27 billion. Oh, they could get for sure 20. No, no, if they make a billion dollars of earnings, they're going to be worth two to three times this time.

1:17:40It comes down to how much they're growing. Yeah. They're not growing that fast. They're going 20%. Well, so what they're trying to do is get to a much bigger earnings number with a much faster growth rate and using the US as the road to that outcome. And so what they've basically said is, this is my guess again, I don't know. We're all in on this strategy. We've got to follow this strategy. The price, all we care about is trying to find someone that optimises for the likelihood of nailing this strategy. We think it's her. Her price is this. I don't know how they got to that price. That price, if we succeed, no one is going to care what we paid her.

1:18:18And if we fail, it's not going to matter for any of us anyway because we'll all be gone. And no one's going to care. Failure is failure. What you're saying is directionally right. It doesn't make it not stupid. Why is that stupid? Well, it's stupid because it's long-term crazy. Why? Talking about the US, so let's look at customer growth because they put an interesting table on customer growth here. Australian customers grew 9 % less. You talk about Australia being hitting its TAM. Australian grew 9%. UK, which is its second best market, grew 7%. US dropped 5%. So you say Australia's hitting TAM.

1:18:52No, Australia's the only part that's even growing at all in this business. Well, that's still hitting the TAM. 9 % growth, not great. Well, it's better than negative 5%. Well, what are you trying to... Okay, agreed. You got me on that one. And it's also better than UK, which is growing at seven. So Australia is the best business it has. UK's dawdling. US is failing. There's the expansion revenue on top of this, obviously. UK's dawdling. UK's failing. And Australia's staying to touch the sides of its TAM. That's my summary of where this business is at. And so it's totally reasonable that they say...

1:19:20The GP was up 24%. Sorry, not 20. If this continues, we're going to lose our valuation. So we better do something. And what we're going to do is we're going to finally, once and for all, try and nail the US. Bloody hard. They got QuickBooks, Quicken sitting there. Yeah. Intuit. Intuit. Yeah. I mean, that's bad news, right? We're going to try and compete with them. Intuit's killed them. They're dropping 5%. The US thing's failed. There's no chance they're going to succeed in the US. Well, you say no chance. Zero. Zero chance that Zero Hawke succeeded in the US. Maybe that's where they got the name from.

1:19:51So it's definitely not zero chance. No, it's zero chance. No, it's not zero. Zero. Well, that's where we disagree. What do you think? So if your starting point is we need a higher valuation in three years than today, what's your better strategy? You know, I never think like that. I think of how can I maximize the profit? Well, that's why you're not in public companies. No, but that's not how Warren Buffett thinks. You think, how can I maximize the cash flows of this business? That's why Warren Buffett ran this business. Warren Buffett would have been having a heart attack if he saw how this business being managed.

1:20:21Warren Buffett has the luxury. I'm even talking about today. Warren Buffett always had the luxury of having a pool of capital and being an investor. But no one that we're talking - Most investors have a pool of capital. Yeah. It's hard to invest without capital. But you know what I mean. Like it was also capital that was like probably - Insurance float is what you mean. Yeah. And even before that, he had investors with locked in capital, okay? And so none of these people have that. These people are the chair of a public company who is going to go eventually and doesn't want to go soon. And the CEO of a public company who's going to go eventually and doesn't want to go soon and wants to make - So the chairman doesn't necessarily want to make a lot of money from this because there's not really a way for the chairman to make a lot of money from this, but the CEO does.

1:21:03The CEO is. Yeah, the CEO is and wants to make even more, right? And so the chairman comes in and says, hmm, we're worth 20 plus billion dollars. Do I think that's justified today? Might be a bit sketchy. It needs to be worth 60 in a few years. What the hell should we do about that? What is a better strategy for doing that than putting all your chips on the US? What's a better strategy? There's no better strategy if that's your... Every strategy is a better strategy than this. This is a losing strategy. I always say it's jobs to be done. You've got a horse. You've got a horse that's got three legs.

1:21:39My strategy is to enter this horse in the Melbourne Cup because the Melbourne Cup's got the highest prize money. Well, your horse only has three legs, so it's probably not going to win. I'm not sure this horse has three legs. In the US it does. There's not a problem with the software. That's not the problem. There may be a problem with go-to-market and some other things, right? And fighting against a massive incumbent brand with huge switching costs, right? And scale. Everything you would dream of not having a competitor, they have decided to, but they've got no option. And so I think, you know why I've now obsessed with jobs to be done?

1:22:08David 30 gets in there and says, jobs to be done. What's the job to be done? Get the share price to grow significantly. I disagree. That's not his job. His job is maximize cash flows to shareholders. That's how business is valued. This isn't valued based on the whim of the PE given by some speculator. That's the short term. what the company's valued as the present value of cash flows get the cash flows up well you should tell me what the weather is in your world I'd be interested to know but here on earth let me tell you about the weather it is that you've got shareholders for those of us living in not 2000 or 1999 as you seem to be living in the moment let's say you've got like a $20 million shareholding in zero I would not have a$20 million shareholding I know you wouldn't but now you do in a cold dark day in hell Now you do.

1:22:55What possible reason would you have as an investor? Not you, Adam Sharp. I have a lobotomy and that's why I rocked up and said, where can I invest in now? What reason could you have? Temple or zero? Try and put yourself in the shoes of the investors that are significant shareholders and zero. It's like putting myself in the shoes of a serial murderer. It's impossible. Right. I'll do both sides of this conversation. I'll do both sides. So investors, they've got one job to be done. What's their job to be done? Get a return for - Make money, right? make money that's their job to be done so obviously any investor that's invested in zero is doing so because they think the share price is going to go up plus or minus they're going to get a dividend flow and so we just think about everyone's jobs to be done so that's the investor's job to be done so when david 30 comes in and talks to investors they say let me tell you what we want i mean they're probably not this honest but what they would say is we want you to make the share price go up that's what they would say to david 30 and if possible make it go up for good reasons and make it stay up or keep going up and so now he's got his job to be done there's lots of jobs governance and all of these things represent shareholders interest ultimately his job is create more value in the business and i can't think of a way to make this business be worth more have any chance of making the business worth more in three years time than nailing the u.s because anything else is going to make the share price go backwards there are plenty of good businesses that succeed without that in the US.

1:24:18I can think of a number of them. Okay, tell me what would make this business worth more than $25 billion in three years' time if it's not success in the US. Well, the question is... Now, you don't like my question, so you just don't... You answer a different question. The question is, will it be... It could be worth$3 billion or $10 billion. It's not going to be worth$25 billion either way. Like, this is a crazy valuation. The question is how low will it go? So now, guess what? Your job interview for chairman has concluded with failure. So you're not going to be chairman of this business. If I...

1:24:45You understand how this works? Yeah, but I'm not auditioning for the role of a public company chairman of over-value business. I'm saying what should be done. And what should be done is focus on Australia and potentially the UK and drive expansion revenue. And Australia growing as well, growing 9%, that's actually pretty good. The Australian business is a decent business with heaps of growth. Focus on that. I tell you the smartest thing to do. Don't take the chairmanship of a business that looks like this because you're faced with a whole lot of bad choices. It's a hiding to nothing. But once you're in there, you've still got to do the best job you can.

1:25:14and wasting money, burning it in the States is not the right way to do it. Well, my experience with David Thoene... And then overpaying a CEO is not the way to do it either. So my experience with David is he very genuinely, he's very patriotic to the country and he very genuinely cares about doing the right thing and getting returns for people. I don't know him very well, but this is not a self-centred narcissistic guy. I think he really came into zero because he thinks he can turn this into a generational incredible Australian slash New Zealand business. And I think this is the only way that could possibly happen without eroding the value substantially.

1:25:58Because maybe I am saying to you, of course I agree with you that they should generate, like they are at scale in Australia and New Zealand and hopefully they can grow in the UK. This business should predominantly be throwing off cash now. It's a SaaS business. it's at scale in its core market it should be throwing off massive cash but you know let's say it goes and turns that two billion australian dollars of revenue into two and a half billion dollars and it throws off i don't know 500 million dollars of impact that would be unbelievable right it's not that it's not that like that that's highly achievable well they'd have to cut a lot of costs yeah so that is not going to be worth the one cost i can start with well that's not going to be worth$25 billion.

1:26:4250 times earnings. It's not worth$25 billion. You can't polish this turd and try and make it$25 billion. It's impossible. It's not a$25 billion business. Well, let's see. It's just what speculators are valuing you. Well, let's see. They're having a go. They're having a go. And basically, you don't like the thesis because you think they should accept that the business is worth less and let the share price plummet. And what I'm telling you is that that is not the way things work. Net profit after tax is$227 million. They're paying like 15 % of that to the CEO. It's crazy. You've sold me on that idea.

1:27:17I'm sold. You can't sell me any more on that idea. What I'm telling you is - But they're all the same. It's one and the same. Forget that you overpaid US CEO. Get someone who, they used to have a great CEO in Australia. Chris Ridd, fantastic CEO in Australia. Trent Innes, great CEO. Obviously, Rod was running it from New Zealand as well. And they had Steve Amos, who I think you know pretty well. Who was the CEO overall. I don't know him well, but I know him. So they had some great focus on Australia and did an incredible job here. And now I've got this US-centric person who's focused on the business.

1:27:44This is the bad kid in the family. This is the one who – You know, this is the problem with your whole argument. Because, like, you know, I'm not disagreeing with any of your argument. I'm saying we're on a field and we're playing footy. And we're kicking around a footy and you're coming on and you're padded up with a cricket bat and you're saying, no, use this. I'm like, dude, that's not the game we're playing here. And you're jumping up and down saying, yeah, but this cricket bat's really good and you should hit it like this. And I'm like, we all agree with you, but it's not the right game. I argue you've got the footy team and you've paid the gridiron guy $30 million to play AFL and the gridiron guy doesn't know how to play AFL.

1:28:22That could also be true, but at least they're trying to play the same game. You are not even accepting this is the game that Xero is playing in public markets and they cannot play cricket today. I think the game, I think what you think of the game isn't the game. I think you'll think that, but your make-believe game isn't the right game. The right game is how I can generate as much cash flow as possible. That will lead to the highest intrinsic value in the business. The game isn't how do I maximise my short-term share price for the next six months. That's not the game. So answer this last question.

1:28:52It's a terrible game. Answer this last question. If you got to run this business exactly the way you... CEO or chairman? You can choose whatever job you want. I'm terrified of you in both roles. So you choose whatever role you want. You got to run this business or you could just tell them how to run this business exactly the way you wanted to run it for the next two to three years. Just answer this one question. Share price, higher or lower than today? Just answer that. That's not the right question. I knew you wouldn't answer it. I knew you wouldn't answer it. My view is the share price drops either way.

1:29:26My point is if I was running this business in three years' time, much higher share price. I think you've - That's what we care about. I don't care about what a share price is today and tomorrow. I care what the share price is in two or three or five years' time. I think you've answered my question perfectly. I think you've answered mine perfectly. That was an action-packed episode as always. Obviously, I won that argument, but better luck next week. Are you shorting zero or not? Just tell me that. Absolutely. Well, yes, it's in the short portfolio. It's in mine, but are you agreeing with me? I agree with you.

1:29:53No, I agree with you that it should be shorted. Yes, I agree with you. I just think - Terrible governance, overpaying CEO, going backwards in its growth market, overpaying for acquisition. Everything's got every... I agree with you. I was sure that we can put that to the short side. And we agree on something. Yeah. Great episode as always. We'll see everybody again on Saturday for our Ask Us Anything. Don't forget to send in your questions via our LinkedIn page, via our... How else, Mike? The pod page, contrarianspod.com. And any of our personal messages, you're welcome to jump in there. Well, you can't message me on LinkedIn because it's off my phone.

1:30:30Until tomorrow when you install it. Maybe next week. Do you use desktop LinkedIn? Well, I have. That was my plan. I was only going to look at desktop because I was getting too much hate mail. Really? Yeah. I only get hate mail from one guy, the doctor, who's your mate, the doctor. I just laugh at that hate mail. I thought you meant me. You can't call that hate mail. Yeah, I got rid of it. Really? Yeah. Okay. I sadly don't get much hate mail. But on that note, please send a hate mail to me. I'll forward it on to our dear. And we'll see everybody next week. Thank you.