We hosted the Digital Disruptors Conference in October 2015. We brought together the entire range of investors - institutional funds, superannuation funds, intermediaries, high net worths and advisers. We introduced a number of online companies to the investor market, and also dived deeper into some well-known names. The companies may change, but the analytical framework remains useful and valid.

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Digital Disruptors Conference October 2015
TRENDS IN ONLINE
INVESTMENT
An investment framework for navigating
the online investment jungle
13 October 2015
George Gabriel, CFA
Principal
Bletchley Park Capital
gg@bletchleyparkcapital.com.au

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Digital Disruption It’s just getting started…
Digital disruption…it’s just beginning, it’s here to stay and it’s gaining momentum.
“The impact of the internet has been extraordinary and broad…but, in many ways, it’s just
beginning…” Source: Mary Meeker, venture capitalist and tech analyst, named “one of the ten smartest people in tech” by Fortune magazine in 2010.
October 2015
• Three key drivers:
 Cloud computing
 Internet penetration – up from 0.6% population (1995, 35m users) to 39% population
(2014, 2.8 bn users).
 Mobile phone penetration – up from 1.0% population (1995, 80m users) to 73% population
(2014, 5.2bn users).
• Gaining momentum because it’s now easier than ever to scale globally at relatively low cost.

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Digital Disruption No sector is immune…
So far, most disruption has been focused on B2C and B2B models. Other segments present
disruption opportunities/risks to incumbents – security, education, health, government.
October 2015
• Sectors impacted to date:
 Mostly B2C, and then B2B.
 To a lesser extent security/safety/warfare.
 Emerging impacts in education and healthcare.
 Limited impact in government/regulation/policy thinking.
Source: KPCB internet trends.

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Digital Disruption
Enormous wealth has
been created
Enormous shareholder value has been created.
• The total market capitalisation of the top 15 global public internet companies has increased ~145x from
 $16.7 billion in 1995; to
 $2.415 trillion 2015.
October 2015

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Digital Disruption An investor road map…
ROAD MAP: Navigating the online investment jungle
• Investors must navigate a complex range of issues – sectors, business models, business maturity, valuation,
regulation and fast-moving outlook.
• To assist, we provide our ROAD MAP for navigating the online investment jungle. We consider:
 Gorilla hunting –
 Finding the next near-monopoly in “winner takes all” markets.
 Unicorn watching –
 Avoid the “Uber effect”.
 Eagles soaring –
 High revenue multiple stocks .
 Gazelle running –
 High organic growth stocks.
 Acorn planting -
 Often early stage, venture-capital like companies still developing business models and testing customer demand. Back-door
listings common entry to market.
 Park ranger ruling –
 Changing regulations change the game.
 Uber example - legality; labour laws; taxation. Also, privacy (big data) issues.
 Valuation guides –
 Traditional valuation metrics do not apply in “winner takes all” markets.
October 2015

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Digital disruption Gorillas and unicorns
Two investors objectives: finding the next gorilla and avoiding the “Uber effect”
October 2015
• Rise of the gorilla (industry incumbent with near-monopoly)
 “Winner takes all” online dynamic drive customer “land grab”, drives near-monopoly outcome.
 Size of the prize – market capitalisations of:
 REA - $6bn
 SEK - $4.4bn
 CRZ - $2.5bn
• The “Uber effect” – shareholder value is effectively transferred from disrupted to disruptor.
 eg. CAB to Uber
 CAB has lost ~35% of its shareholder value since Uber arrived in Australia.
 “Rule No.1: Never lose money. Rule No.2: Refer rule No.1.” – Warren Buffett.
$2.50
$3.00
$3.50
$4.00
$4.50
$5.00
$5.50
$6.00
$6.50
CABshareprice($ps)
CAB ($ps) ASX200 (relative)

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Digital disruptions Gazelles and eagles
Two investor objectives: run with gazelles and pick eagles carefully.
• Gazelles are high organic revenue growth stocks, with less demanding valuation. Can be good portfolio
holds.
 ACX
 Revenue almost doubled in 3 years (FY12 - $44m to FY15 - $82m).
 Share price - $2.04 to $4.17 (from 5 June 14 to today).
• Eagles are high revenue multiple stocks. Can be profitable if investors have skill and judgement to pick the
right player in the right segment include
 Examples include XRF and FLN (~10x forecast revenue multiples).
 Private markets transactions often justify public market multiples:
 Menulog (17x revenue) – online take-away food ordering
 Lynda (10x revenue) – online eduction
 Internet of Things (IOT) acquisition valuation range - 2.5x - 11.2x revenue
 Caveat emptor: overpaying has obvious risks!
October 2015

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Digital Disruption Valuation paradigm
Traditional valuation metrics do not apply during the “land grab” customer acquisition phase.
October 2015
• High revenue multiples are justified by customer lifetime value (CLTV) in winner takes all markets.
• In “winner takes all” markets, customer ‘land grab’ opportunity emphasises sales and marketing costs,
impacting short-term cash flow generation and reported profits.
• Winner obtains a near-monopoly, acquired customers add material value over the customer’s lifetime.
• Accordingly, EV/revenue metrics are more appropriate proxies of valuation than traditional
valuation metrics (eg. P/E, yield, EV/EBITDA).
• Australian investors are familiar with this dynamic and have valued stocks with these characteristics on
EV/revenue multiples ranging from 1.4x to 13.6x (average 7.8x). Examples include Xero (XRF), Freelancer
(FLN), Urbanise (UBN) and Surfstitch (SRF).
Company Ticker
Share
price ($ps)
Mkt cap
(A$m)
Online land grab stocks FY14A FY15A FY16F
Xero Ltd XRO $15.00 2038 24.8x 14.0x 9.4x
Freelancer Ltd FLN $1.88 635 20.8x 18.2x 13.6x
Surfstitch Ltd SRF $1.69 405 2.4x 2.8x 1.4x
Urbanise Ltd UBN $0.70 170 34.0x 16.6x 6.9x
Average 20.5x 12.9x 7.8x
EV/Revenue

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Digital Disruptors Outlook
Internet of Things (IOT), sharing economy, unbundling
October 2015
• Sharing economy valued at more than “old world” companies.
 Airbnb (private valuation US$25.5bn) vs Marriott hotels (market cap US$19.6bn)
 Uber (private valuation US$50bn) vs taxi companies
• Unbundling of bundled services.
 eg. department store model is under siege.
• Consumer sovereignty
 Regulators catching up to support consumer demand eg. ACT legalises Uber.
• Internet of Things (IOT) is highly valued.
 Recent acquisitions from 2.5x to 11.2x revenue.
Date Target Target Description Acquirer Acquirer Description EV EV/revenue
Dec-13 ThingWorx Founded in 2009. Platform for building and
running applications for the Internet of Things.
PTC Inc.
(NASDAQ:PTC)
US$112m 11.2x
Mid-14 Atego Founded in 2010 by merger of Aonix (founded
1996) and Artisan Softw are Solutions.
Developer of model-based systems and
softw are engineering applications
PTC US$50m 2.5x
Dec-14 Axeda Founded in 2000. Developer of solutions that
securely connect machines and sensors to
the cloud.
PTC US$170m 6.0x
Average 6.6x
Technology-enabled solutions
for manufacturers to improve
their products and services. Is
acquiring businesses to
expand its customer footprint
in Internet of Things.