Netflix Dumped, SaaS Meltdown, Koala Deep Dive, Are Private Schools Worth It, Airlines and Goyder’s Parting Disgrace

22:40So here's a question for you. In Sydney, so I'm in Sydney at the moment. By the time this airs, I'll be back in Melbourne. So in Sydney, I happen to read about private school fees and the cost of private school fees in Sydney. They're lower in Melbourne. And I presume the numbers I'm going to tell you are for year 12. So all of the top schools are about the same price now for year 12. You can round it out. Ballpark, how much do you think it costs for the top five or six schools for the year 12 year? $50 ,000? Yeah, well, you're right. It's$50 ,000. I think it's$48 ,000. Okay. $48 ,000. Yeah. And I saw these two facts that were spoken about as part of this.

23:21I saw that, number one, people are predicting it's going to$100 ,000 within the next decade. Well, doubling in a decade, 7 % annualized growth is going, isn't it? So that's hardly. It's a lot faster than the economy and a lot faster than wage growth. Everything grows faster than wage growth, but it's not as fast as electricity or insurance premium or a bunch of other stuff. I'd happily take 7 % compounding growth. Yeah. The other thing is, did you see that 20 years ago, in the equivalent inflation-adjusted dollars of today, so it's not a perfect example because obviously house prices are much faster, but the inflation-adjusted equivalent would be 27K today versus 50K.

24:00Well, inflation isn't right. I agree. I agree. If you compare it to gold, which is the real inflation. Well, today. If you compare it to gold today. Yeah. So gold's in that time, what, five, six, six or something. So it's actually under before. Gold one year ago, I mean, it would be half of what it is, right? So like, this is the trick with this. I actually think the best thing to compare it to is house prices because people can't really afford to pay for houses and people can't really afford to pay for private school fees. And so they're stretching themselves for both of those two things. And so that is what I'd be comparing it to.

24:37But this is my broader question. It's a double-barreled question and it's a question to both of you. So you went to a call for grammar, Adam. So you went to a private angler school. Famously went to the same school. Yeah, it's famous. I've seen it on billboards around town. And Mike, do you – Mike, do you want to say what school you went to or is that some kind of secret because you were expelled or something for repeating good advice? Yeah, no, I went to St. Kevin's College in Melbourne, which is a private school, yes. So we've all gone to private schools. Mike, you're not at the stage where you have to worry about school fees yet.

25:16You're going to send your kids to a$50 ,000 a year private school. How do you feel about that in terms of the value you get from$50 ,000 after tax sending your kids to private schools? I've thought a lot about this over the last few years and I always, I think I got a really good academic education and I was sort of trained to be academically successful, which I think is obviously a good result for the school, but I don't know if that necessarily translates into like life success. and when I think about spending$50 ,000 on one child's school fees, I think that's really steep and I do wonder like what the value of that is.

26:00Like how does that translate to solid value for that kid compared to the public system? And I don't know the answer. Because obviously that's only the year 12 price, right? You're not going to be paying that for kindergarten but that is after-text dollars and like I'm assuming like at 100K you'd be like, that is just ridiculous. Like, I'll be better. I mean, I know where Adam's probably going to go with this. What do you think, Adam? I think it's too simplistic to simply say, is 50K acceptable or not? I think there's multiple other questions need to be asked. One really obvious question is, what is the public school alternative?

26:33Some public schools are as good or even better than private schools. Some are, frankly, not very good. So I think if I can send my kid to Elk Park College, which is around the corner for me, which is an exceptional public school, if you can go to Melbourne High, if you can get into Melbourne High on Macrob or the equivalents in Sydney and Brisbane, If you're at a very good – McKinnon High in Melbourne – if you're at a very good public school and the difference is relatively minimal, then 50K is a lot to spend. If you're at a not very good public school, then maybe 50K is worthwhile. So that's point number one.

26:59Point number two is what's the kid like? Is the kid academic? Is the kid wanting to be a doctor like a deer? Or is the kid wanting to be a bricklayer? If the kid wants to be a bricklayer, you probably don't need to go to a really academic school. If the kid wants to be a doctor or an engineer or a lawyer, maybe there's more benefits. I think there's a couple of threshold questions you need to ask and answer before you simply say is 50k good or bad that's a good point but what i mean is not is it good or bad but like good or bad value for money maybe another way of saying it is yeah well what's the consequences of fifty thousand dollars because this is my bigger concern so my kids go to and went to private schools if you want your kid to go to a school like a culturally specific school by that i mean jewish or muslim or whatever it might be apart from catholic because catholic schools are like famously cheaper my daughter goes to a catholic school but um if you want them to go to like a culturally specific school you got to pay or else they're not going to be going to a culturally specific school that's just how it goes and yes like jewish schools for example have subsidies etc to help but the bottom line is if that's what you want then you're not going to be able to go to a public school irrespective of education because you're not going to have that bit of it if i talk to my parents when they were growing up it was much less common to go to a private school much less and they just went to like sunday schools for the cultural side of things and that's what they did my bigger worry is once you're starting to i already joke with um even the private schools today if you go to a private school what you're seeing in terms of the students who are there is that their parents are either heirs or professionals or in finance occasionally like they might run some small business or something like that but like people doing regular middle management jobs like it is almost impossible for them to send their kids to private schools at these prices and my bigger concern is that once the prices keep escalating you know my my just general fear of our society heading towards like the aristocracy type approach to like that we're never too far from like that world and like the feudalist world and it's extreme because obviously is not feudalism, but the increasing disparity between people that have money and people that don't have money is problematic in the West.

29:13And I think this march in prices for private schools is going to result in the people at private schools only being surrounded by other rich people. And I think that is deeply problematic for society. A few points there. A friend of mine, who's a son goes to a very well-known eastern suburb of Sydney school, was saying almost every single dad at this school doesn't work, which goes to your air point. And you can probably guess what school I'm talking about. And also Australia is really unusual. You go to the UK or US and there's a tiny percentage of kids go to private schools. Obviously uni is different, but in the UK, it's actually more, it's$100 ,000 a year now.

29:49So 50 ,000 pounds to go to private school. And as a result, obviously almost no one goes. It's like 5%. Australia is like 30 to 40 % or some crazy number. So Australia is on its own unique in a ridiculous number of kids that go to private school? I think it might be more than that. I think like a third of Australians attend either a Catholic private school or another kind of private school. It could be a third in Australia, I think. So you think a third... What percentage do you think go to public schools? Forget all the other ones. Well, you can work that out by one minus a third. Okay, so we're saying the same thing.

30:20It's like... Well, so we're saying the same thing. Yeah, but I do want to say... Look, at least half of the ones who go to private school go to a Catholic school, which has got totally different pricing. Although St. Kevin's, where Mike went, used to be a lot cheaper. And now Xavier, I'm talking about two private Catholic schools in Melbourne, the eastern suburbs. So Xavier was always priced pretty much the same as the Loristons and the Caulfields and the Scotches. And St. Kevin's was about half. And now St. Kevin's is basically the same as Xavier. It's caught right up. So that differential, there still are some cheaper Catholic schools, but the differential has closed.

30:54In terms of percentage, 63 % public, 20 % Catholic, and 17 % call it independent. So the numbers we're talking about were pretty much right. But it's rising, right? Like the prices are going up and the enrollments are going up percentage-wise. I think to answer your question, I find it bizarre. I think for most people, you're getting a far greater ROI. And this is, I'm talking about a blended ROI. So you've got academic results, social, all that kind of stuff. And there's a bit of a caveat that you need to have a decent-ish public school that you can go to. But assuming there is a decent-ish public school you can go to, If you look at the present value from year seven of six years of education is probably 200K.

31:36Then if you look at the post-value, if you'd invested all that money through the education period, when somebody gets through to year 12, the kid could have a choice. If you said to the kid, I can give you$400 ,000 in today's dollars or give you private school education, what would you rather take? I'm not sure too many kids wouldn't take the 400 grand, to be honest. Yeah, but if you say – the way to say it as well is I'm going to send you to a public school and I'm going to diligently deposit the money that I would have spent on private school just into, I don't know, like – ETF. ETF, yeah. Like ETF or some kind of ETF.

32:14And so when you finish school, not only are you going to be able to have a deposit for a house, but you'll have like a pretty substantial percentage of the value of a decent house. it's i mean that is going to have a more positive effect on um i think the life of that person than the private school england is also different because you know there's this big sales pitch of when you go to private school you make these networks i can tell you apart from the guy that's now one of my very best mates adam goodvack who lives in israel and like i did start my first business with him i was barely i mean he would say we're friends we were friends at high school okay and i don't deal with anybody else that i went to high that i was in high school with and the other two people that were in the same high school as me is sean holthouse who started catapult and you and i only met each of you separate you're in different years to me and so i think this whole network effect at least at call for grammar for me i don't know if you feel differently about that it just was non-existent that pitch did you did you did it help you adam no i think jess went to my school but that was getting coincidence i think it's i agree with I think it's highly overrated.

33:21I think where you get the benefit is – but you're going to get bad cohorts at private schools as easily as public. Like there were years in my school that had terrible cohorts. So like I don't think privates – My year was dreadful at Caulfield Grammar, by the way. I thought it was dreadful. I was year seven when you were in year 12. Well, you might have known more people in my year than I did, to be honest. Like I didn't really – I just thought, what the hell am I doing here? And like who the hell are these people? and I didn't think the standard of education was high. The standard of sport was very high, but then when I got – I didn't really want to – like first 18, like they made me play it and I got hurt every week and I tried not to play it and they didn't care.

34:02They just forced me to play it, right? So like I mean, you know, I love the sport, but that was pretty much the high point of that school. Yeah, I think the value in – like the fact that I think there's some schools where they send the majority of the bills straight to the grandparents. It just shows the intergenerational – we talk about intergenerational theft that's happened in Australia, that the fact that these fees go to grandparents, obviously grandparents pay it and criticize the grandparents because that's not their fault. A lot of grandparents, yeah. But yeah, it is a significantly dire situation where people feel they have to send the kids to a private school and don't pay.

34:37I think in most cases, not every case, but in probably 70%, 75 % of cases, for people currently at private schools, you're better off ETF and give them the ETF, the 400K at the end of year 12, and they're away. And you've still got – you could spend a couple hundred bucks a week on tutoring as well, so probably get most of the education benefit anyway. So the most ironic part of this whole conversation for me is, like I did pay for my kids to go through private school, and I paid for them like I was not like born into wealth, this huge wealth, right? I was born like middle class, comfortable, and so I paid for the school fees myself.

35:15and it was very painful. And the irony of it is I would do it again even after this conversation. Now part of that is because I wanted my kids to go to Jewish schools for at least some period of time, like my son went all the way through. But I know rationally that everything we've just said in this discussion is right and yet emotionally I would still find it so hard not to do it. Oh, but for you the fees are a bit of a rounding error. No, they were not when I was paying for my kids to go when I was – like, you know, I spent a long – firstly, I went through medical school. I was a student for a long time.

35:50Then I spent a long time building a start-up, and it took me like a long – Yeah, but your kids aren't 40. I know, but it took – you know, definitely when they went through primary school, it was a significant expense for me. Like, it was painful, no doubt about it. Oh, you went to primary school as well. So my kids go to public school in primary, albeit in grade five or go to private. So, yeah, the amount of money we save is pretty incredible. Because obviously when we sent them to childcare, it was basically, it was 100 grand a year. So it was effectively what you pay for private schools. So going from childcare to a local public school was a pretty incredible transition.

36:23Yeah, well, I think when you consider, like, if you had two kids, you're paying minimum 70K a year, and then you're going to pay mortgage repayments. And so if your mortgage is, I'm going to say one and a half mil, I don't know anyone that's got a one and a half mil mortgage, maybe two and a half mil. Like, so a two and a half billion dollar mortgage at 5%, that's another 125K. We can round it up to 200K just for those two things. So that's post-tax. So that's$400 ,000. Like, how the hell does anybody afford that? Just for that. Well, it's just for that. You probably need, and then your living expense is another 100.

36:57So you really need 600. I mean, and so not many people earn that at all. That's why the grandparents pay the bills. That's right. Well, because, you know, I want to say, Like the grandparents paying the bills, if they're on the pension phase of their self-managed superannuation fund or even not self-managed, every bit of their earnings inside that fund is tax-free and they're compelled to take money out of it every year. And so the economic dynamic of the grandparent paying for the school fee is substantially less than the same economic dynamic for a 35-year-old worker doing it. like that's it's not just that the grandparents have had a lifetime to make more money it's that the economic structure of superannuation is so attractive for them to do that that it makes a huge difference speaking of which i know i caught a tram yesterday with my leg and i'm not driving and i'm riding a bike and i noticed someone tapped on it was an older person they tapped on they got half price tickets obviously you get concession tickets if you're over 60 i think it is and i for a second, this is the most, and to your recent conversation, how ridiculous is it?

38:03You've got millionaire 70-year-olds who have all this money, and you've got 25-year-olds on minimum wage struggling, yet the 25-year-olds are paying double the tram fares to these wealthy pensioners, wealthy older people. The world has gone, we live in this bizarre world where nobody thinks about stuff. Like, obviously, 100 years ago, they said, let's give pensioners half price or free public transport. Nobody thinks now, hold on, older people are wealthier than younger people. Why are younger people, and they're double funding it, because they're also paying taxes, to your point. So younger people are getting smashed, and a 30-year-old on 70 grand a year is paying a bunch of tax, and then they're paying double what this pensioner who's got$10 million in super is paying.

38:49The whole thing's just, like, completely sick. Yeah, I totally agree with you. I mean, I know lots of people over the age of 65, 70, and they have, I don't know, more than a million dollars in superannuation and millions, let's say, sometimes, and they all are so excited about their seniors card that gets them all these discounts. And it's like their argument would be, because I'm not into bashing boomers, okay? Like they did not rig a system that made property prices do what they've done. They did not create this. It's not the boomers' fault. It's politicians' fault. Yes, and so that's why I'm not into bashing boomers.

39:26I really don't like that, and I know why. I'm bashing the system. I understand that you're not, but in general, a lot of millennials will bash boomers, right, and Gen Z. I'm not into that at all, but I do think that there is something that is very perverse about exactly what you've just said, that boomers seem to have this. I know what they would say is we've paid taxes our whole lives, and you're currently. And the government's in massive debt, So you haven't paid enough tax. Yeah, well, I think that's not really true, right? Like a lot of the debt has been accrued pretty recently and post-Boomer's paying the majority of taxes.

40:01But the reason why we've got some part of the reason the budget's so unbalanced is stuff like NDIS or healthcare costs specifically. Well, yes. Because obviously born by older people. Yeah. And then you've got super being effectively tax-free. So, and there's all those rorts. So if we fix these rorts... oughts we can say the taxes that boomers have paid in the past are being used in the present to cover their hospital expenses i mean that's that's the truth and not even covering it is the point and but not covering it so it's it's effectively being funded the gap so that we talk about a budget deficit that gap it's not the deficit the gap that's basically younger people and not people not born yet paying for older people stuff and again i'm not blaming the older people they just i don't choose it it's the it's the governments of the last 50 years that have continue down this road of let's we'll put our vote ahead of any kind of sensibility yeah well i think that i mean you've summarized it perfectly which is we can have these long sophisticated conversations about tax structures and fairness etc but ultimately every time that there's a thought on policy including taxation policy there's focus groups then there's people that come in and do some numbers and then they say you know if you remove this benefit to people over the age of 65 even though most of them are not voting for you as a labor government the ones that do like they're going to flip and you'll lose this seat this seat and this seat or you might lose government and no one is prepared to do that because ultimately politicians want to be re-elected that's their primary motivation let's go to a quick break back with some business stories just in a moment.

41:49And we're back. And it seems like the market has very much fallen out of love with Netflix since its controversial bid for Warner Brothers Discovery. Netflix share price has slumped 40 % since June, and it's now sitting under$400 billion market cap. Netflix itself isn't actually performing that badly. The company grew revenue by 16 % last year. It is forecasting 13 % growth this year around the midpoint of projections. And the Wall Street Journal noted that driving this growth obviously isn't getting any cheaper, and Netflix is now seeking to become a player in the pricey live sports arena. But aside from the sliding growth, it seems the market just hates this expensive Warner bid, which is now basically a quarter of Netflix market cap.

42:27The bid obviously does remain subject to government approvals, as well as obviously David Ellison's Paramount's competing bid. Adir, are you bullish or bearish on Netflix? As a business, I'm bullish on them. Like I think they've pulled away from their competitors. They have a fundamentally better operating model. Their brand is substantially stronger. You know, mostly these wars get fought in the US with a bit of international stuff added to them. Yeah, I think they've broken substantially clear from competitors. And as I think we discussed this a couple of months ago on the podcast, because the thing is I don't really use any of these services.

43:01Remember I told you I pay for them but don't use them because other people who I've learned to use them, like kids. But you both said to me, the baseline is that you subscribe to Netflix and then you decide what else you want to subscribe to. I think that's the answer to your question, how do you feel about Netflix, isn't it? I think the question is Netflix now has a multiple of 35 times. So it's not expensive in the scheme of things. It's income. What's its revenue growth? It's making about 3 billion. So it's top-line revenue in the last quarter. It's about$12 billion a quarter now. I think it did$11.5 in September quarter.

43:37Does it grow fast? It doesn't grow that fast. It's sub-20%, isn't it? Well, 16%, as I said, and forecasting 13. It's been very consistent. If you look at the – it's linear. So it's continually growing at a nice level. It's growing – it started making money a couple of years ago. And so does the earnings growth faster than the revenue growth? Yes. Its earnings, it's looking like, its earnings was, for 12 months, ended 31st December 24th, it earned 8.7 after tax. And now it's on track for about 12. So it's about 27 high 20s. Oh, that's a 50 % growth, 45 % growth. 37, 37%. Just over a third. So it's still getting leverage out of its revenue growth?

44:26Yep. Well, as it scales, for sure. It has uptake that is similar but not the same as a utility. But I agree with you. It's a good analogy in some respects because you can't turn off your electricity. You could turn off your Netflix, but it would be a dramatic thing to do, right? And remember, the beauty is you're paying$17 a month. That's not a lot in the scheme of things. Yeah, it's super cheap. That's right. And also, its revenue growth is much faster than a utility like an electric business. Its earnings growth is leveraged more like a software company that has passed an inflection point and is still keeping tons of its revenue as profitability.

45:04And the question is, do you pay 35 times for that? I mean, probably. It doesn't seem unreasonable to me. The thing about cheap Netflix is, remember we used to go to the old Blockbuster video shop back in 20 years ago? And I think, to your earlier point on inflation, I think if you look at stuff from 20 years ago, it's probably 3x in price, most things. like house prices have probably done that. Most in court, 3X. Gold's done more, but let's assume a 3X since then. So back then, you'd spend$6 to$7 on an overnight new released video from Blockbuster. Let's index that. That's$20 now for two hours.

45:40And let's see how much Netflix, people on average probably watch, call it 50 hours Netflix a month, I'm going to say. So for basically the same price or for less, you get 50 hours entertainment versus two. You could say the cost of entertainment, because of Netflix and everything else, has deflated by, what, 90 plus percent? It's actually remarkable. That's why no one goes outside anymore. Yeah. But it's so cheap and you get such value. I agree. And that's where you sort of get the Stan and sort of second, third. You probably have that with three. I think two to three streamers is almost, in a sense, for most people, utility.

46:18Like when you start getting more than that, it's getting pricey. but certainly two. Well, I think Netflix is in a league of its own though, right? Like we would say Netflix is in a league of its own. It's just because Netflix has got amazing – obviously Reid Hastings is a massive Hamilton Helmer fan. He wrote the foreword to the book famously and Hamilton talks about Netflix a lot. Nobody's a better acolyte of Seven Powers than Reid. And if you look at how they run the business, the scale benefits, they basically said we're going to make our own shows as we grow our audience. We can now get a massive scale benefit.

46:48Instead of paying$1 or$0.10 or$0.50 to Disney for watching every time you watch a show, they make a show and the cost drops every time somebody watches it on a per watcher basis. So they lean into scale six, seven years before everybody else and for years reap the benefits. And the question is, they've done that now. There's a limit to how much – they've got the utility status. They can't. So now it's sort of, is the growth more commoditized would be the question I think the investors are asking. Well, I'm trying not to be anchored by their current valuation. But my view is if this was on 20 times earnings, you say, God, that's cheap, definitely buy that up.

47:26Yeah, for sure. And if it was on 50, I think I'd feel it was very expensive. And I think this 35 feels like it could still go a bit more, but it's not cheap, it's not expensive, it's in the middle. It's gone sideways, hasn't it, in the last year, the share price? Yeah, it was down 40 % since the Warner bit. So not sideways at all, downways. No, but that's more recent. That's the last few months, right? And so over 12 months. And over last year it was maybe 5 % down. 5 % down maybe? It's pretty flat, right? I think most of these, apart from Alphabet, most of them are pretty flat over the last 12 months.

47:56I actually think the cheapest of the Magnificent Seven, who do you think I'm going to say? Well, Netflix isn't Mag 7. Netflix is a fang. Oh, yeah, that's right. We'll put that as Mag 8. But who do you think I think the cheapest of the Mag 7 is? We talked about Amazon being the cheapest, but I'm not sure if you agree with me there in our predictions, Em. I think Meta is the cheapest because Alphabet's the best. We said Alphabet's the best business in the world and it's now the only one that's increased in value substantially of the Mag 7. Like, it is in a category of its own. And I think Alphabet price-wise, Alphabet's PE isn't huge, isn't it?

48:30Yeah, I think it's low 30. So a lot of them are low 30s. The reason I look at Meta is I think, like, Meta, I don't think they're going to be disrupted by AI. I think they might be on the right side of AI. Like, they're not the leader at the moment, but I think they'll actually be fine with AI. Well, as we talked about, they actually use it. Internally they use it, yeah. They're actually using it. Remember when Apple screwed them over and they've now much better than that because they've used AI to get around Apple's restrictions. And I just say this in the system in the simplest way that I can.

49:02So we think the business is very strong and I think I'm right in saying they're the only one of the Mag 7 that has these two characteristics, revenue growth greater than 20 % and a PE under 30. I think they're the only one with those two characteristics. And I look at that and I'm like, can't really work out why that has lagged in that way. Seems like people have kind of forgotten how good they are. People definitely have not forgotten how good Alphabet is. Alphabet's been flying. Yeah. I think if you look at Netflix, it's hard to see it dropping in value too much. It's your point. Like I said, it drops to 20.

49:37You think there's 20 multiple and this is an incredible buy. Well, I'll be buying for sure. Yeah, it's not like it's – it's hit utility status. There's no one who can really – short of – remember you talk about this and the TV paradigm is a great one. You went from sort of broadcast linear TV to cable, which is linear as well. And that was effectively the faster cart. And over the top, which is Netflix became the car. So I don't think there's any cars on the horizon for Netflix. There's possibly some faster carts. But even then, I think Netflix feels like Netflix has 10, 20, 30 years of dominance till someone comes up with a way to disrupt it.

50:15But I'm just not sure it's easily disruptable. Well, the thing is as well, because so Netflix has got these two things going for it, like the production of content and the distribution of content. And so what happens if in five years time, people just want to watch shows that are made by AI? then Netflix maybe because one of the things Netflix is their advantage in production is that distribution still yeah but they can spend so much money on production they can outspend other players on production and so that advantage might disappear that's like a scale advantage let's call it a scale power so they might lose their scale power on production but they'll still maintain it on distribution would they not would they not be able to produce great AI as good as anyone and they've got their distribution on the AI We're agreeing on that.

51:01We're agreeing. We're saying that they retain their scale on distribution, but if their production just goes and is as good as anyone else's and the extra money doesn't help them, then they lose their scale power on production. And we'll go into our favourite segment, the M &A Deep Dive, of course brought to us by our great friends at Terim Capital. They, of course, acquire companies, technology companies, that grow sustainably over decades. If you think of a selling idea, who do you call? I call Terim. Is that the good answer? I really actually would call Scott and have a call. I mean, basically what I wouldn't call because I've got nothing to sell him.

51:35But if someone came to me and said to me, like, this is my business. Like, I think I'd like an exit. It's been around for a while. It might be profitable. It might be a spin out of something bigger. I would absolutely say, let me connect you to Scott. I think he's the right guy for you to speak to. Yeah, the Berkshire Hathaway of Australia. So discuss how it might work at terium.capital slash contrarians. And want to chat about something I've talked about on the show. So, and you know more about this sector than probably most people, Koala and Street Talk reported that the mattress and furniture seller is targeting a first half listing and is seeking $100 million raise at a$400 million valuation, although the deal terms and timetable won't be decided until after feedback from investors.

52:15A book build is hoping to take place in early March. Koala, of course, got its start selling mattresses to millennials back in 2015, and it seems expanded to most home goods categories. And this is actually really impressive. It grew revenue 42 % to$276 million. EBITDA grew by 280%,$13.5 million in the last financial year. That was way ahead of the sub-10 million it had forecast for the period, so it's beating its expectations. Since its last pitch to fund managers in May, it started selling products in the UK, as well as Australia, the US, and of course, it's got a great Japanese business. Corala's got obviously a heavy online model with a handful of pop-up stores and expected to be pitched as a business that sits between the$1.5 billion online Temple and Webster and the$2.2 billion Nick Scarley.

52:59Of course, when we talked about this last, Temple was trading at near all time highs. And now it's Nick Scarley, it's up 70 % in the last year. So thanks to Street Talk for breaking this story. And this is obviously a fascinating one for us. And I'd hear your thoughts on the guys down at Koala. Well, my thoughts on them are positive. This Koala IPO, So it's like the Elon Musk, I'm going to Mars. Like you hear it and it always sounds closer and every year it gets repeated and like you wonder if it's ever going to happen. It's more like the Elon Musk self-driving, which is now happening, but he talked about it for a while.

53:32Well, you're right. That's a better analogy. And so I think the total number of hours that we've spent talking about a koala IPO on this podcast without it actually happening is not low. I think this might actually, I mean, notwithstanding markets have got some problems. I think it might actually happen. Like those numbers, they're good numbers. Now, they do have some interest expense, I presume, because I know they took a chunk of debt. Yeah, interest is irrelevant. Yeah, and I think there's no, like what I'm saying is, I think the free cash that it's spitting out is not the EBITDA. I think there is actually an interest expense.

54:04I think they'd be honest about capitalization and stuff like that. I think the EBITDA and the EBIT, probably the main difference is just an interest expense, and I think it's a pretty honest number. The revenue growth is tremendous. I'll tell you what I think about this business. Like what has it got going for it? In Australia, the brand is really good. Now, it is a bit of an ironic brand situation because it doesn't give pricing power. It substantially reduces CAC. I don't think they need forgiveness. But the challenge that they have, in some ways, it's a similar challenge to Kogan's challenge and maybe also to Temple and Webster's challenge.

54:38But let's talk about it with regards to Kogan. What they're known for is having good stuff at a pretty cheap price. and I think that the ability of Koala to extract pricing power from their brand is very constrained and even when they've moved into sofas which I thought was a very smart move by them like they still can't compete with King for example like they can't get up into that space or anywhere near it and I don't think they're the quality of King is my take on them but in the niche in which they operate I think their brand is really strong and I think what they're demonstrating here is you can make money out of it.

55:12I just don't think they're going to get to the Nick Scali kind of margins. Like this 20 to 25 % EBIT margins. I think that is possibly beyond them as a business because Nick Scali makes furniture that wouldn't cost much more to manufacture than Koala. All right, they've got a store network, but that also drives their revenue. And their ability to price is much higher than Koala's ability to price. That's my main issue with the koala business but lots of businesses operate successfully on a you can afford us you know type model like as a price point kogan is a great example of that costco walmart like there's some pretty pretty good retailers that aren't luxury the difference is costco selling other people's stuff walmart is selling other people's stuff there is no use kogan as an example is they sell stuff that is kogan branded a lot of it yeah but kogan sells a lot of non-kogan stuff as well they do but koala doesn't and so that means yeah whatever the koala brand is it's going to sit on these products and like I think you'd pay a thousand dollars for a sofa but you I don't think you'd pay three thousand dollars for a sofa from koala maybe I'm wrong about that but like I look I wouldn't and so and look you know I'm conflicted because I'm connected to the Eva founders and I help them but like I would for them but I wouldn't for koala and I think that's going to be their margin limitation let's call it but as a business I think they've turned the corner and I, without knowing anything that's going on the inside, what value, do they want 400 mil or something?

56:38Was that what was reported? It was mooted at 400, but who knows what the real value will be or what they want. That seems all right to me. Like, I mean, it's not cheap. Like, look, if you've got trailing EBITDA on, what did you say, let's say 280 just to round it out. So 5 % EBITDA margins. But growing very fast. So this is a rule of 40. It's a rule of 40. It's well above rule of 40 now. It's almost 50. 42 % revenue growth plus 5%. Yeah. It's rule of 47. Yeah. I don't know if I'd use that for like a vertically integrated retail business rule of 40. But yes, I think my bigger thing is this. I don't think it can keep growing at 40, but I do think they can drive their margins past 10%, their EBIT margins.

57:16As they scale. What I think Temple can do. They'll clearly benefit from scale. Remember when we talked about this? It would have been about a year ago, maybe just under a year ago. I had a similar conversation and I was much more bearish because they were, obviously they're forecasting sort of 10 million EBITDA and they wanted 500 mil. They've improved their performance massively and they've reduced the ask. So I now look at it at, call it 30 times EBITDA with a 40 % growth and probably at winding, and they are winding the jaws significantly. These guys could do 25, 30 mil EBITDA next year. That actually feels pretty reasonable.

57:49That's 13 times with the fast growth rate. I actually think this is now, I think Danny coming back is a massive benefit. I think he's a great operator. Obviously Mitch is great as well. I've got two really strong leaders. I think this is a business that at$400 million I'd buy based on the limited numbers we have. By the way, like Tim Doyle, who runs Eucalyptus now, which is its own rocket ship, which we don't need to talk about, but he built that Koala brand. I would give him the majority of the credit for building that brand. Obviously a very good operator. Great operator. Would you rather buy Koala or Temple and Webster for$400 million, Vel?

58:25Oh, for$400 million? Oh, Koala. I agree with you on that. Like people keep saying to me like that I'm so bearish on Temple and Webster and I keep saying we're not bearish on them. We're just bearish on the price. Koala is a much easier business than Temple. It's vertical. I love vertically integrated retail. It's such a powerful model. You control everything. The margins are so much better even with Koala's lack of pricing power in my view. The margins are still better and like I just love everything about it and I just think vertically integrated retail, that is the way of the future. You want to know how to make, I think, the most money in the next 10 years is watch the rise of VIR as it takes over more and more categories in retail and I think this is exactly why.

59:09Well, it's not exactly, it's not a new concept. A little business called Hermes is a vertically integrated retail. I mean, it's called Louis Vuitton. So these are 200 years old businesses. I know, but they sell a lot through third parties. Hermes doesn't. Hermes not really. Yeah, I agree with you. All I'm saying to you is, and that's luxury, but yes, we're in agreement. Like I cannot believe that it is not so obvious to everyone that if a business like Dyson existed today, they would sell probably 90 % direct and Hermes, they are 90 % direct. And like Aesop, they're even like a lower value product, but like they're a vertically integrated retail business.

59:44A ton of their stuff is direct and their stores do a lot of heavy lifting on brand. And it's so obvious to me that this next decade is a tremendous opportunity for vertically integrated retail to take so many more categories of retail. And I think Koala is in that space. They're not the best of the players, but they're good enough. If you talk about non-vertically integrated retailers, there's only a handful of ones that are even in here. Like you've obviously got Walmart and Amazon. Amazon's questionable whether its retail business is actually worth much. But I guess if you add the media, it probably is.

1:00:14Then you've got in Australia, you've got a great business like Kmart, which is really, call it a Walmart clone. Costco, but it's got a lot of the increasingly its own brands. Kmart increasingly vertically integrated. You could argue that about Kmart as well. So there were very few, and Walmart's probably the only one. And Walmart's had a great run, to be honest, to be fair. All right, but when you buy online, when someone in your family buys online, when someone in your family walks down the street and buys from a store, almost every store that they're purchasing from is third-party retail selling other people's stuff.

1:00:45That is still the world we live in today. And you're saying the big ones, the big ones are vertically integrated. Yes, I agree. But the vast majority of sales still come from third-party retail today. I'm not sure. Supermarkets, obviously. But if you walk through Chadston or Bondi Junction, and you see a lot more vertical stores like All Karns, Mecca. Mecca does sell other parties as well. I know the wave is coming. Well, Mecca is a classic third-party retail store. Oh, but it's got a lot of its own stuff. It's got some of its own stuff. Like that is a third – and so I think everyone looks at the margins and likes it, but vertically integrated retail is not just about the margins because home brand – I do not call home brand like selling your own cheap brand to just maximise margins.

1:01:34That to me does not fit my definition of vertically integrated. Funny enough, looking at – look at probably the best retail, one of the two top retailers in Australia ever, or both of them. Look at Brett Blundie and Solomon Liu. And Solly obviously had his – That's their model. He had his big Meyer thing. And look at where the Liu family's made basically all their money in the last 30 years. It's been seed, all kinds, a house, all this stuff where they basically just do their own thing in China and bring it in. Peter Alexander. Peter Alexander. Yeah, exactly. Smeagol. Yeah. So Solly picked this up probably before most people here.

1:02:07And obviously Brett Blundie's been doing it for a long time as well with LaVisa and bras and things and other stuff. But these great retailers realise you've got to go vertical. And they realised that well before the market did. And so the majority of categories globally are still not dominated by vertically integrated retailers. And also venture capitalists are allergic to them because of the bad experiences they had with the early ones that tried to build brand with mediocre product, which by the way, just to be honest, that is where koalas started. You mean like the Allbirds type? Yeah, Allbirds.

1:02:37Like the Allbirds situation. Yeah, Allbirds really put people off Casper even more. and so I think I always say product, like you have to have product-centric businesses if you really want to drive margins but like I think Koala has been on an amazing journey. Like their original pitch was we send this mattress to you, it comes in a box and you can return it and that was a very revolutionary pitch at the time that they started but over time that became less of a revolutionary pitch with all these competitors and I think that they have done a pretty good job recently of figuring out how to make money with that business and where to position it.

1:03:13So yeah, long on the short, I think we're in agreement on this. I just realized, I never thought about this before with Tim starting eucalyptus, but what do koalas eat? I don't know if there was a link there, but I never thought about that. I don't think that is coincidental, Adam. And moving on, we've seen it's an absolute catastrophe in the price of SaaS stocks. This is both in Australia and around the world. Obviously, reaction to the vibe coding phenomenon. and of course these businesses, everything in Salesforce lasting were priced very much for perfection. Adir, your views on the SaaS meltdown.

1:03:43So it's an AI driven SaaS meltdown. And like if I say it simplistically, it is that people were nervous about AI anyway with SaaS and then this Claude Cowork thing came out. And what Cowork basically is... It's a front end for Claude Code. So Claude Code is a tool for developers to do something called, we can call it vibe coding. It's such a bad term. But like it means you can type in some prompts to write code, but it's really for developers because the code needs to be heavily adjusted and manipulated in order to work properly. And you know how to instruct it and prompt it, which is unless your developer's hard.

1:04:22Yeah, for sure. And now there's co-work and the co-work is pitches. is in two weeks we used Claude Code to create a front end for Claude Code where your grandmother can use it, you know, kind of thing, right? Really simple stuff. And so people are going bananas that basically everything's going to come crashing down for SES and the world is going to end. And I made it like I've been thinking about this a lot because obviously it's been very relevant as a conversation because I've got a lot of experience with SES and Catapult essentially is a business with SES-type economics. But you've got hardware though, so you've got very much.

1:04:59I know. So I've been talking to a lot of investors about Catapult in general. I think what's happening is there's a few interesting things going on in the market. So number one, like this stuff is going on with AI and its effect on SaaS. And it's making a lot of SaaS businesses very cheap. And so a lot of investors want to meet and have a conversation about, you know, God, there's a lot of value in you guys. I just want to ask you some more questions about the business type of thing. And a lot of these are existing investors. And so I'm talking to them a lot about their views on AI and SaaS and what will and won't be disrupted.

1:05:37And then there's this secondary dynamic going on. You're probably aware of this, but like basically resources have come tearing back to be the primary driver of growth in ASX indices. and I would think that there's a bit of a narrative which is people feel like the world is going on another growth spurt and whatever China says or doesn't say its numbers are, it will be all right. China will keep growing. And you've got gold price at$4 ,700. And think of two, like Northern Star and Evolution are now two of the top 20 companies in Australia by market cap, which is incredible. Yeah, and so one investor, I won't say his name, but he said to me a very funny thing.

1:06:18He said, I've made a list of like why Catapult is not rocketing to the value that we think is inherent in the company. Here's my list. Reason one, you're not a gold miner. I said, let me guess reason number two is that I'm not a lithium miner. He's like, yep. Reason two, you're not a lithium miner. So definitely there's some of that going on in the market with respect to SaaS and a rotation into resources. but I thought pretty hard about this AI quandary around SaaS because you know this general panic is not without some reason and validity I suspect we're going to disagree on some of this I'll give you my list of six things but there is some validity in it even though I think that at the moment everything is just being smashed together great stuff and terrible stuff I think these are the six questions people should ask about SaaS businesses to think about the effect of AI on them.

1:07:17Because the question is, you know, can a couple of developers use AI to replicate? Can you Vibecode JIRA? Which I think you can, to be honest, pretty quickly now. Okay, we'll get to that, okay? But tell me if you agree with these six questions. So these are companies that are at risk and not at risk. So one is, do you service software developers? Does your SaaS service software developers? I think that's my starting point because there's a risk of your software being disrupted by developers with AI. And then there's a separate risk of what a developer is actually going to need in the way of tools in the future.

1:07:54So that would be my starting point. That's the Jira risk, the Atlassian risk, really. That's why I think Jira is in its own category. And I think Jira is especially bad because it's a really simple piece of software. It's not complex like Xero, for example. Even Salesforce, which has much more layers of complexity. So Jira is almost the most, and that's why Alassian's down like 75%. Alassian's actually the first company in Australian history, I think these numbers might be like to the dollar, but no other company's ever lost$100 billion of market value. And I think Alassian's managed it. So I don't think Jira's dead.

1:08:26We're going to get to that. But I think if you service software developers with your SaaS, you're in your own category. Well, things like, say it's not dead, but the yellow pages still go. So of course it's not dead. but the question is what multiple should it get? But yeah, we'll go back in a second. The next thing is, are you vertical SaaS? I think vertical SaaS is, not we're saying this developer thing, is fundamentally more robust than horizontal SaaS. By vertical, I mean you service a specific industry because in that situation - Like a wise tech, basically. Yeah, there are lots of arcane things that go on inside an industry and you have spent - Well, that's the accounting software.

1:09:01Yes, exactly. You've got the tax thing. It's much harder to build. I think the question there is complexity. Yes. So how complex is the subject matter? Jira, not complex. And how arcane. Wise tech, very complex. So by arcane, I mean, how hard would it be for someone that doesn't have deep expertise in this industry to understand what you need to build to be amazing in this industry? So I think vertical sass is better than horizontal sass, which is a piece of software. Like Slack is horizontal sass, right? It doesn't matter what industry you're in. It's a tool for communicating. The risk with even the arcane products is eventually AI becomes so good that it can actually take the arcane products as well.

1:09:37So you look at an Intuit or a Xero, which obviously has to deal with taxing all these jurisdictions. Well, eventually AI probably gets there. It just takes a little bit longer. Well, I think it takes a lot longer because not only does it have to figure out what's going on and have to get it right, but it has to know how the accountant wants to interact with it. But I agree with you. We're not saying here things are impervious to being attacked by AI, but this is just a hierarchy of how susceptible you are. So vertical is better. Worse to best. The next is, do you have proprietary data? So if you have proprietary data in your platform, if your platform is rich with proprietary data, then that is much, much better because proprietary data cannot be replicated or sidelined by something being built by AI.

1:10:20What's an example of proprietary data? Well, I think like SAP has tons of your company's proprietary data sitting inside it. and so like that's going to be like some of that data is not just what your company's put in it's stuff that sap has done to that data to make it more usable and functional i think i think degree of complexity of initial integration i think is probably the relevance there well i'm going to get to that because i'd call that something else i'd call that switching costs but i haven't wanted to use catapult really in this example but i do like a business like catapult which collects all of this data from wearables and that sits inside the platform.

1:10:58And like that data, like something built by AI that builds a SaaS platform can't replicate that data. Well, you can't replicate the hardware with AI. Yeah, well, that's another challenge, right? But like I'm talking about pure software businesses, if you've got proprietary data sitting in there that you own, maybe another example would be, I'm going to use a marketplace, not really SaaS, but REA. So REA is lots and lots and lots of historical data around listings, purchasing, et cetera, et cetera, that deep layer of historical proprietary data cannot be replicated by AI building, a replica of REA.

1:11:32A marketplace, obviously, because you've got to build both sides. Yeah, yeah, correct. The next thing is, I've actually got seven, not six. Were you Hamilton Helmet? It's going to be cost, but yeah. So the next one is a service layer. So a business like Qualtrics, are you familiar with that business? Qualtrics is a market research platform. Oh, I've heard of them, but I don't really know exactly what that is. So they were bought by, I'm going to say SAP bought them for a while. Someone like that bought them and then re-IPO'd them. So Qualtrics pictures themselves as being a pure SaaS business, but actually there's a deep service layer inside there that provides market research services to its customer base that's using the platform.

1:12:09A lot of people don't realize that many SaaS products actually have that service layer that's there as well. Like there are many things that AI can replicate and they can replicate a bit of that service layer, but a lot of that service layer does rely on person-to-person human interaction. So I think SaaS businesses, ironically, that are not 100 % pure SaaS and also have quite a heavy service layer of advisors, consultants, people, they're more protected, right? The next one is what you mentioned, switching costs. You know, SAP is the ultimate switching cost. I'm mentioning SAP a lot here, but any business that has a very high - NetSuite, Oracle, yeah, yeah.

1:12:45Salesforce or anything with like, you've got five or six year contracts, that's also a switching cost. Salesforce less. Like we switched off service cloud and marketing cloud in six months. So yes, it's cost, but it's not SAPs. Like you rather lose a leg. Tarder than Slack though, Salesforce. As in Slack's got better switching costs or Salesforce got better switching costs? Well, I think Slack has lower switching costs, doesn't it? Yeah, no, I agree with that. Because you go to terms. You can just, yeah. And so - Slack obviously owned by Salesforce. Yeah, but then the core thing. And so I think switching costs are also contract length and nature of contracts.

1:13:22So people overlook switching costs. Like lots of business – again, I use Catapults as an example, but it's not just us. We typically have three contracts with teams, right? And so that is a switching cost as well as all the other switching costs we have. So I think that's my fifth point. And probably one of the biggest ones actually, and maybe the biggest is AWS slash Azure slash Google Cloud. And obviously people use a combination of them all now. But once you're on AWS, we switched off. We were using Heroku, which is a Salesforce product, which is sort of its own one. And to move to AWS was probably 18 months.

1:13:58That was like a – and the guys did an incredible job and it was a great integration. But that was a big lift. I can't think of anything bigger than that. Assuming you're a big business, a big online business, switching off your cloud is probably the biggest one you can do. Well, people really who don't, you know, lots of investors or just people in general that don't deal with large business or enterprise clients do not understand that one of the biggest switching costs is that everyone is used to using a particular platform and people know all of the nuances of it and the whole organization is using it.

1:14:35And moving away from that, like that incumbency is super powerful and people really underestimate that. It's like when people say, well, the front-end presentation layer of SaaS is dead because now you can just use a chat dialogue box for AI and build whatever you want dynamically. Yes, except people want predictable stuff that they know how to use and they know where everything is and everything is in its place. The presentation layer is not imminently dead from AI. Like, it's not true. Yeah, but I think you can vibe code something pretty good. Like, I had a discussion with my CTO just literally this morning.

1:15:08I said, can we vibe code Ajiro and see how it goes? So I'll report back on how, if we've been able to do it. But there are businesses out there who have vibe-coded Jira for sure in like a couple of weeks. That's a separate issue. Like that's a whole other, that's the core issue of this. But the other thing people are saying is, let's say the Jira front end will be totally replaced by an AI dialogue box where you can dynamically generate whatever look and feel you want. I think they might add that to it, but they won't replace it. People like predictable presentation layers that they're used to.

1:15:38That is a fact in the enterprise world. You're probably the worst customer for a company to have because you're a substantial size business run by a founder who's like super across the detail and very cost conscious. And also vindictive. Like when Salesforce promised us a discount during COVID and then lied about it and said, no, we're not giving you that discount. So we ripped out two Salesforce clouds. So Pip Marlow, who was running Australia, wasn't really her fault, but she had to bring the news to us. But like, have you seen a dumber move by a SaaS business? They lost like effectively millions of dollars of market value because they lied.

1:16:10and we just said, okay, we're ripping it. We kept sales, sales cloud for now because you have to, and we'll probably keep it for the foreseeable future. But when we can Vibecode sales cloud, I'm sure we will. Yeah. I'm sure everybody will. That's true. So you're right. Your list of why you're the worst customer continues to grow. And so the last one of my six before the cost is whether or not your SaaS product is mission critical. So stuff that is mission critical to a business, to a customer, the customer will be much more reluctant to try something else if they have something in there that it works.

1:16:45Like a cybersecurity product might be one example of that. And so none of these are insurmountable, but they do. They are, I don't know, additive or multiplicative. You can use whatever fake maths you want in describing it. They all increase the barrier. And the last one, of course, the seventh one is the cost. So cheap stuff is going to – people are much less, more reluctant to bother replacing cheap stuff than expensive stuff. That's basically all Jira has going for it. It's cheap enough that, oh, it can't be stuffed. Well, I'll ask you about Jira because you're about to say some dude on the internet that's built a big company said, look, I coded Jira in – what was it?

1:17:22Through two weeks or something, right? And I've replaced. Yeah. Well, lots of people say it. Yeah, lots of people say it. And so you answer these questions for Jira, which is the Atlassian product. Do you want to just say what it does in a sentence? It's like an online post-it note board for product managers and developers. So you say, I want to build this piece of software or this feature for my website. And somebody, right, this is what I want to build. And then it sort of gives tasks and all that sort of stuff. So it's like a project management software. So let's talk about how many barriers they have against disruption.

1:17:50Are they a service for software developers? Yes. Yes. Well, that's not good. Absolutely. Are they a vertical? They are vertical. They're a software developer vertical. So they've got the strength of being a vertical, but the disadvantage of being a vertical for software developers. Yeah. Verticals us. And also it's a vertical which doesn't have complexity, which is the problem. So it's your version. So yes, usually when you say good verticals are complex verticals. Yeah, they could be a one or two out of five strength on the vertical, not a five out of five strength. Do they have proprietary data?

1:18:25Is there any proprietary data? No. Yes, you put all your stuff on there. So there's legacy stuff on there for sure. But it's your data. Yeah, it's your stuff. It's your data. Yeah, it's your stuff. So you could move that data to somewhere else. Yeah, but it's probably a hassle. Well, that's a switching cost, but it means they don't have proprietary data. I thought your proprietary data would mean your data on their system and you've got to move the data across because that's a hassle. Data that is inherent to the business itself, to the SaaS business itself. So Catapult captures data that's inherent to Catapult.

1:18:57Like other people can't just say, oh, yeah, we also captured the same data. Okay. Well, it's very rare. And like REA, that's why I use that example. Yeah, it's rare. Like REA has information that is unique to REA that someone can't just replicate. So JIRA has no – That would be highly, highly rare. Yeah, but it's a big barrier, right? That's a big barrier. And so they have no proper data at JIRA, so that's not good. Do you get any service layer as part of subscribing to JIRA? I don't mean customer service. I mean – No, I don't think so. So you're just subscribing to software, right? A notice board.

1:19:28Yeah, a notice board. Now we come to switching costs. So how do you feel about if you had to try and switch your stuff off there onto your own Vibe-coded one, for example? I don't know the answer to that. Probably a degree. Not huge, but not Oracle SAP, but nor is it nothing. And so do you think you would consider it, do you're a mission critical to your business? Well, you need something. Like you couldn't just get rid of it and not have anything. If it went down for five days, what happens? Without a replacement. Oh, you could survive. It just wouldn't be ideal. It'd be better than your payment system going down for five days.

1:20:00Oh, totally. Yeah, totally. So I'd just say, it's 20 % mission critical, right? The problem is, like when you say it's mission critical, the better question is, that I'm not sure is its own, because if something's mission critical, so our email, so we used to use Salesforce service, marketing cloud. Clearly that's mission critical for us. If we don't send emails and SMSs and WhatsApps out, we're a bit fucked. So clearly that's high. So what we did, it took us a year or six under a year and we transitioned off at Debrae's, which is much better and blah, blah, blah. So yes, it's mission critical, but I'd say it's more what's the cost of switching.

1:20:33But your willingness to – maybe that's part of switching costs. You could be right. Maybe mission critical is part of switching costs because it kind of influences your preparedness to try something else. Influences the risk if something goes wrong. No, you're right. That's part of switching costs. So maybe you can call it, or maybe instead of mission critical, call it, it's more like ramifications of the transition not working. Well, I think you sold me. I think you persuaded me that it's switching costs. I think I agree. I think you have a bit of a point. It's a subcategory of switching costs, zone nuanced category.

1:21:07And lastly, with JIRA cost, it's cheap, so it's got that going for it. That's by far what the absolute saving grace is it's cheap. If it wasn't cheap, it'd be dead, for sure. But because it's cheap enough, that's all it has, I reckon. And the other thing that I haven't got on here, because I can't, I don't want to attend things, but the other thing is SaaS businesses at scale, like they've got more to lose, but also they've got deeper moats because they do have scale and they can, whereas a business that is just in the process of scaling up, like if Jira was just in the process of scaling up and all of a sudden something came to start replicating it using AI, obviously it would have much less of a chance to try to deal with that problem.

1:21:46have a where would you put i'm sure you've mentioned it somewhere but it's not sure which category exactly but this is where jira isn't good but like so let's i'm trying to think of something that has lots of it's probably part of switching costs as well but lots of external integrations so if you look at let's say you're using uh accounting piece of accounting software and you pay invoices are paid on it it's a bit of a mission critical thing but you use it for external stuff it's connected to lots of external stuff well you've answered your own that's much You've answered your own question. It is definitely, that's part of switching us for sure.

1:22:14Yeah, and Jira doesn't have that because if you use just internally versus if you used externally. So look at something like Shopify. Shopify is the most critical thing. So that's not going to get disrupted because it's mission critical on every front and there's no alternative. Well, you can go through Shopify on these questions. Does it service developers? No, that's good. Is it in a vertical? Yes, that's good. Does it have proprietary data? I think they are starting to layer on their own analytics into there. So that's a yes. is there a service layer? No, they don't. Or just a piece of software?

1:22:43Yeah, no service. Are there high switching costs? Definitely there are high. The things you said and a million more and like it ticks the subcategory of mission critical. Like if that goes down, you've got no business. And is it expensive? It is expensive. So there is a motivator to try and switch. But I think the bar of switching is just too high. It's not if you're little and you make no money. But as you grow, you know, like the price of it increases on a scale. right? I think when you say expensive, I think what you've got to say is expensive versus the alternative. If I could get rid of sales, if I could get rid of Shopify as a platform.

1:23:18There are, there's big commerce, there's alternatives. I know, but I could save$20 ,000 a month plus anything I'd save with reduced merchant fees. No, you'll save$20 ,000 a month, but you've got to build an alternative, which I don't think is possible. So that's the issue. But I've got$250 ,000 a year to build an alternative. So it would be a big saving. I just don't think you can build an alternative with AI because of these barriers that we just went through. Well, you can build it. It'll just cost too much. But yeah, so I think that it's a separate question. The thing with Jira is I think Jira wouldn't be that hard to buy.

1:23:54I agree. Whereas Shopify is incredibly hard to buy. They're in different categories. And by hard, I mean costly. So yes, the cost is relevant, but also the cost of the alternative is also relevant, So Jira's cheap, but the alternative is cheap. Shopify's expensive, but the alternative is even more expensive. I changed my list based on this discussion, which is not are you in a vertical, but are you in a complex vertical? I think that was a good point. So I changed it to are you in a complex vertical? And I made mission critical a subcategory of switching costs. And I think this list, how long is this list?

1:24:25It's back to six now. I think these six things. And these six SaaS powers. Pretty interesting to assess how much of a risk AI poses to SaaS businesses. And I think what we're seeing at the moment, like SAP is down 20%. I can tell you, like AI vibe coding is no risk to SAP today. And so this is called throwing the great stuff out with the junk. So I think part of it, so share prices, so Atlassian is down 75 % from its peak. Although that peak was ridiculous, but it's down 40 % in the last few months. So I think part of the drop off is just a general, call it voting machine, weighing machine. Investors are just, investors were in love with SaaS ridiculously.

1:25:05They got these stupid revenue multiples. Remember Atlassian was on like 50 times revenue or something? Just these crazy multiples that are so beyond belief. So there's a bit of the realism coming back into these idiot investors, speculators, have started to get the plot a bit more. So that's point one. And that's probably a bit of SAP was probably just overpriced. Then you've got the point two, which is there is actually real risk these businesses die. And it's not 100 % risk, because if there's 100 % risk, that'd be zero. there is a risk that, a big risk that Atlassian loses a chunk of revenue.

1:25:33Somebody vibe codes JIRA and then just gives it away for$5 a month or whatever, like for nothing, then Atlassian loses a chunk of certainly growth. Maybe it retains existing businesses they roll off over time, Yellow Pages style. It's not going to go to, like Atlassian's not going to go to zero, but the question is, what can Atlassian go down to? Could Atlassian go down to a$5 billion business that still makes, maybe it makes a billion dollars a year on a multiple of five, because it's not growing. like it's possible yeah i mean i think that would be extreme but i take your point i mean well people said that when i said it was the most overvalued business it was worth 150 billion aussie it's now worth under 50 billion aussie like that's a ridiculous drop nobody was in the world was saying that i know but i agreed with you on that but i don't think i agree with you that it that its inherent valuation is five billion dollars no i'm not i'm not saying it is either i'm saying there's a world we live in where it could be.

1:26:26Like it's not zero. There's no world where SAP is worth 5 billion that we live in, but there's a world where Alassian is. There should be a ratio. We should coin a ratio, which is the amount of money the founders have taken off the table over the current valuation of the business. And do you know what the high watermark for that is? I know I was just talking to someone about this the other day. I know what you're going to say. It's got to be Setire, right? Yeah, we're actually talking about it on the show, but Setire's current – What's their market cap? It's actually at 242, so it's popped up.

1:27:01Well, it's better than it was. And I think Dean's taken about 330. 330. So he's at 1.3 or something, isn't it? Yeah, about that. 1.5 actually. So he's running it. So Setire on the contrarians, what do you call it? Contrarians founder enrichment ratio? it was 3x at one point which would have to be a high watermark like founder having 3x the current because usually when that happens the business dies as in the lists so it's for a listed business to be 3x i'm not sure there are that many out there that it like to be that savvy to be able to sell at the peak which is really what we didn't sell peak peak we sell pretty close to the peak that was one of the all-time inverted commas great sell-offs you'll ever see we've got to find it we've got to find a name for that ratio because that is too good a ratio.

1:27:47So we'll think about a good name for that ratio because I think that is the most fun ratio in business, isn't it? I think that's the most fun ratio. By the way, I don't begrudge the founders for doing it. They just showed, they just outsmarted speculators essentially. Well, I predict that DroneShield will end up high on that ratio, but they're low now, but I think they'll end up high. I've got another one for you. Kate Morris. Oh yeah, Adore Beauty. So Adore Beauty was a 600 mil vel and we're going to say insiders not just the founders for that one so i think the insiders sold down what 250 or something quadrant between quadrant yeah so kate took about 100 out so kate and a ex-husband and quadrant took out probably a similar amount and then quadrant sold out the remainder so they'd be pretty close to not much even if you just said 200 the market cap of that what's the share price they got 100 million shares one 110 so they're at 2x let's call it So their ratio is two.

1:28:38They might be the current winners. Yeah. Or what's Dean? Oh, Dean was 1.5. Yeah, the clubhouse leaders. So Dean was 1.5. Dean's 1.5. Yeah, Adobe is the clubhouse leaders. It's a funny way to say it. Any listeners, come and let us know, listeners, if you can think of any other. Oh, please let us know. This is the most fun ratio. And I just want to reiterate, as you said, we're not making fun of the founders. We're making fun of the market for letting them do it. Yeah. The founders outsmarted the market. Yeah, no one lied. Like none of these guys are in jail. They just, they realised that market's overvaluing things and we'll sell into this irrational market.

1:29:14Like probably not something I personally would do, but good on it for doing it. Like if you can outsmart a market, you can outsmart a market. I've got no issues with that. We have issues is where there's dishonesty and they haven't talked about stuff and they've talked, they said the business has got great prospects and it goes bankrupt six months later. That's a different story. But certainly the door guys didn't do it. Maybe Sentai is a bit close to the wind, but anyway, it's still trading, so probably not. I'm still trying to figure out whether there are any institutional investors that have gone back into DroneShield or whether that 150 % rise is only retail.

1:29:48Yeah, I can't find an – And if you look at DroneShield's ratio, it's low. It's only probably 0.1. Because the denominator is so high. Exactly, yeah. Because it's back to 5, 6, 5 billion now. What is it now? It's crazy. And DroneShield's literally up every day. it is up 7 or 10%. Like it's unbelievable. Drones sales 4 billion, sorry. And they sold about, how much did they sell? A couple of hundred? I thought it was less. I thought the CEO sold 70 or something like that. He was 50. Yeah, it's 100. Maybe they're low, low. Yeah, it's like 3%. They're not even on the scoreboard. Not even honorable mention for those guys.

1:30:25Got to lift drone shield. That was a great episode out of here. A couple of great indexes at the end that we'll definitely cover in the future. Thank you, Michael. We will finally be back in person next week when you decide to grace us with your presence, I dear. Looking forward to it.