Post on 23-Jan-2015
description
Financial InformationSustainability Plan
Summary Financial Data
Elevate will generate revenues from sale of Internet based bundled products and services to the residential market of the United
States. The Company intends to go to market primarily through 250 direct sales representatives and 1,000 network representatives in
fiscal 2014. The estimated roll out expense is expected to be around $1.3 million. A significant portion of this will be used to procure
product inventory and recruiting and training the representatives.
The company expects to launch its IPTV and security platforms by the second quarter of 2015, which will significantly enhance top-line
growth. Revenues are expected to grow a significant 288% in 2014 and 243% in 2015. Cost of sales will also increase in tandem with the
revenues but at a decelerated pace. On an average, COGS is expected to account for the 60%-80% of the revenues and operating
margin are expected to remain in the range 5%-18%.
PRELIMINARY INCOME STATEMENT
Economic Model Revenue Assumptions
Representatives
Elevate derives revenues primarily from the sale of individual and bundled products. The Company depends on direct representatives
and customer referrals for the sale of these products. Some of the representatives are also the customers of the company and are eli-
gible for greater product rebates. The Company also provides web hosting services to the representatives for managing their accounts.
This provides additional source of income.
Overall, direct sales representatives are the primary revenue generators. These are the students recruited by management directly from
the college campuses. Management expects the number of active sales representatives will play an instrumental role in driving rev-
enues. The Company currently has 50 active sales representa tives in the field. Management intends to hire another 200 sales
represen-tatives throughout the year. Accounting for the attrition, the total number of representatives stands at 151 in 2014.
Network sales representatives are expected to form the largest sales channel and will be the strong positive catalysts for driving future
revenue growth. This group of representatives is formed through customer referrals and comprises existing customers of the company.
It is estimated that each existing and new direct sales representative will bring along with itself 2 to 3 network sales representatives on
an average per year. This will create a multiplier effect, increasing total number of representatives. Representatives are expected to
increase from 494 in 2014 to 12,331 in 2018.
Total Revenues $Cost of Goods Sold $ Gross Profit $Gross Margins
Operating Expenses $EBITDA $EBITDA margin
Depreciation & Amortization $Operating Profits $Operating Margin
Tax Expense $Net Income $Net profit margin
Units outstanding (Par value - $1 per unit)
Earnings per Unit $
Income Statement ($)
9,343,885 25,715,131
73%
18,329,281 7,385,850
21%
918,757 6,467,093
18%
1,694,357 3,953,499
11%
33,676,000 0.12
YEAR 1
35,059,016 136,648,055 44,403,068
92,444,98768%
51,297,551 41,147,436
30%
7,063,881 34,083,555
25%
10,211,004 23,825,675
17%
33,676,000 0.71
381,432,196 143,674,719237,757,477
62%
119,089,971 118,667,507
31%
24,668,503 93,999,004
25%
28,199,701 65,799,303
17%
33,676,000 1.95
330,192,255 542,155,061
62%
236,496,226 305,658,834
35%
56,978,173 248,680,662
29%
74,604,199 174,076,463
20%
33,676,000 5.17
872,347,315 1,769,875,622 670,901,833
1,098,973,789 62%
453,834,717645,139,072
36%
113,935,167 531,203,905
30%
159,361,171 371,842,733
21%
33,676,000 11.04
YEAR 2 YEAR 3 YEAR 4 YEAR 5
It should be noted that attrition rates in the direct selling industry are high. As a result, a total attrition rate of 80% is considered normal
and within industry averages. It is estimated that roughly 50% of the total direct representatives that are hired will leave the job the with-
in three months and 30% within six months. Approximately 50% of the network sales representatives will leave the job every six months.
Sales from direct representatives are expected to be higher than the network representatives. For example it is assumed that each
direct sales representative can sell 20 bundled products to nearly 20 customers per month or one customer each day on an average,
while network representatives are estimated to sell less than one bundled product per month. Sales are expected to be lower from
network representatives as many of them are not full time representatives. Some of them are the customers of the company and are not
actively selling directly to consumers.
Direct Sales Representatives
Existing Representatives
New Recruits
Attrition rate - 2 mths
Attrition rate - 3 mths
Net Cumulative no. of
representatives% Growth
Network Sales Representatives
Existing Representatives
Representatives (new additions)
Attrition rate - 2 mths
Attrition rate - 3 mths
Net Cumulative no. of
representatives% Growth
Cumulative Sales Rps
Recruitment Assumptions
200
(60)
(14)
151
-
-
1,000
(360)
(44)
494
-
645
2014
151
450
(118)
(26)
405
169%
494
2,500
(940)
(136)
1,625
229%
2,030
2015
405
750
(213)
(51)
799
98%
1,625
5,000
(1,900)
(270)
3,831
136%
4,630
2016
799
1,250
(358)
(82)
1,456
82%
3,831
7,500
(2,900)
(424)
6,978
82%
8,434
2017
1,456
2,500
(711)
(162)
2,783
91%
6,978
12,500
(4,800)
(694)
12,331
77%
15,114
2018
IPTV
Wireless Internet
VoIP Phone
Security Sales
TV Sales
Cell Phone
Direct Rep Sale Unit Assumptions
0.00
6.75
11.25
7.50
11.25
0.75
1st Year
18.75
11.25
11.25
7.50
0.75
1.50
2nd Year
IPTV
Wireless Internet
VoIP Phone
Security Sales
TV Sales
Cell Phone
Network Rep Conversion Rate Assumptions
0%
4%
4%
4%
4%
4%
Half Year
4%
4%
4%
4%
4%
4%
After
50
Unit Sales
{ 4 }© 2011 ALL RIGHTS RESERVED | ELEVATE | A WHOLLY OWNED SUBSIDIARY OF HIGHLAND BUSINESS SERVICES, INC.
Revenues from some of the products including TV and some security are one-time fixed in nature. The sales made for these products
are for a third party. The company collects one-time fixed commission from these sales. Elevate expects to secure their own IPTV
plat-form and equipment by third quarter 2014. The Company will also secure its own home security platform by 2014. Other than
this, the company plans to build out its wireless network. Elevate intends to offer this service by the second quarter of 2014.
Sales from other products such as VoIP phone, IPTV, wireless Internet, and home security are recurring in nature. The Company col-
lects a one-time activation fee along with monthly recurring commissions. Elevate is expected to sell VoIP phones from the beginning
of 2014, while sale of IPTV and wireless connections will begin from the 2nd quarter of 2015. All home security sales assume the ratio
25%:75%, implying 25% sales made for the third party while the rest is made for the in-house security platform. This is in-line with the
industry standards.
Sales Price Assumptions
Selling price of the each product will vary. It is assumed that price will remain steady over the five year period. Sales price
assumptions for each of the products is listed below –
The business is seasonal in nature, with peak sales and recruitment activities occuring between May and August. It is expected that
the students get more free time to carry out sales activities in the summer holidays.
Cost Analysis
Cost of Sales
In addition to the direct cost of the necessary device required to use the service, the Company’s primary cost of sales is the
commission paid to its sales representatives. There are primarily three forms of commissions paid –
1. Sales commission – These are direct commissions paid to the representative, who made the sales.
2. Recurring monthly commission – These commissions are paid to the company by the customer for
the services availed
3. Commission management – These are commissions paid to the representatives for any sales made
by his team member
Home Security
Home Security HOLD
Digital Phone
TV
IPTV
Wireless Internet
Cell Phone
Website
Postage
Representative Kit
Manager Kit
Sales Price Assumptions
1799.00
199.00
25.00
200.00
100.00
75.00
100.00
9.95
500.00
1250.00
Fixed
40.00
24.95
49.95
49.95
59.95
50.00
Recurring
Digital PhoneDigital phone (VoIp)Digital phone (VoIp) -shipping fee
VOIPVOIP recurring monthly feeVOIP commission VOIP commission managementVOIP recurring commission
TV
TV sales commissionTV sales commission management
IPTVIPTVIPTV commissionIPTV commission management IPTV commission recurringIPTV monthly fees
Wireless InternetWireless InternetWireless Internet commissioinWireless Internet commission mgtWireless Internet commission recurringWireless Internet monthly fees
Cell PhoneCell phoneCell phone commissionCell phone commission management Cell Phone Commission RecurringCell Phone monthly fees
Home SecurityHome security holdHome securityHome security hold monthly feesHome security commissionHome security hold commission recurringHome security hold commission mgt - 1st year Home security hold commission mgtHome security commission recurring
Website hosting feesRepresentative kitsRepresentative recruting commissionRepresentative website rebateRepresentative product rebateManager kitsManager recruting commissionManager website rebateManager product rebate
Cost of Sales Assumptions ($)
40.009.00
7.0040.0020.00
5.00
80.0020.00
150.0040.0020.00
2.5020.00
100.0040.0020.00
2.5028.00
100.0040.0020.00
2.5035.00
310.00310.00
15.00300.00
5.0050.0050.00
5.00
5.00125.00
50.00250.00500.00200.00200.00250.00
1000.00
Unit Cost
2.00
10.00
5.00
4.00
Unit Cost
Representatives are also paid recruiting commission for building their sales team. This commission is paid to the one-level up
represen-tative and managers. Other expenses include costs associated with hosting website and product rebates.
Operating Expenses Other operating expenses are fixed in nature, and include costs associated with advertising, marketing, salary, rent, bank charges, etc. This is shown in the chart below.
Operating expenses account for 5% to 13% of total sales for the company. R&D reimbursements, recruiting expenses and salaries to
the full-time employees hold the substantial portion of the operating expense.
Advertising/MarketingBank Service Charges Computer/Internet Incentives Liability/WC Insurance Legal Merchant Fees Miscellaneous Office Supplies Owner Referral Program Postage Recruiting Costs Rent (office) Salaries Sales CommissionsSales Returns/AllowancesTaxes (Payroll)TelephoneTravelUtilities
Total Operating Expenses
Operating Expenses
2,400 22,500
106,776 100,005144,000 133,758
6,000 17,796
713,750 24,914
2,306,760 173,994
1,563,927 11,475,488
71,184 156,393 89,430
266,941 12,744
6,048,060
2014
444,901 3,600
42,000
150,008 172,800
1,340,345 12,000 69,965
1,560,568 97,951
3,910,323480,000
3,029,03435,271,770
279,860302,903258,014
1,049,477 24,000
307,847
14,185,079
2015
1,749,128 5,400
120,000782,951225,012241,920
4,885,324 24,000
195,7383,505,731
274,033 6,670,475
480,0005,409,068
84,377,084782,951540,907412,466
2,936,067 24,000
30,583,164
2016
4,893,444 8,100
240,0001,611,439
337,517338,688
11,323,07936,000
447,622 6,562,724
626,67111,160,828
480,000 10,101,898
167,593,8411,790,4881,010,190
791,0816,714,330
24,000
61,172,174
2017
11,190,551 22,703,49712,150
360,0002,906,048
506,276474,163
23,080,52954,000
908,14012,333,2451,271,396
19,938,524480,000
18,552,797322,237,936
3,632,5591,855,2801,427,070
13,622,09824,000
117,069,285
2018
Valuation
DCF Valuation
We have used discounted cash flow method to derive the pre-money valuation of the company. As the company is in early growth
stage, we believe a two stage discounted model is appropriate.
We have derived the market risk premium, which is calculated over the risk-free rate, by considering the historical risk premium of the
U.S. equities in the bundled service industry. Market risk premium is considered to be 5.0%. As Elevate’s credibility in the market is
not yet established, we have assumed an above average industry beta of 1.80 to reflect default risk premium and factored 14% for
the liquidity risk premium. Risk free rate is assumed to be the interest rate on 10-year US treasury notes. At the time of preparation
this report, the 10-year US treasury had a yield of 3.62%.
Based on the preceding inputs (risk free rate and the equity risk premium) and the Capital Asset Pricing Model (CAPM), we arrive at a
cost of equity of 28.8%. Assuming post tax cost of debt of 0.0%, we arrive at a weighted average cost of capital (WACC) of 28.8%.
Cost of Equity Equity Risk Premium Spread for company's liquidity Risk Estimated Equity Risk Premium Risk Free Rate Beta Cost of Equity
Cost of Debt Pre-tax Cost of Debt Marginal Tax Rate Cost of Debt
Weighted Average Cost of Capital Debt to Capital Ratio WACC
Terminal Multiple WACC G (Perpetual Growth Rate) Terminal Multiple =(1+G)/(WACC-G)
DCF Valuation Assumptions
5.0%9.0%
14.0%3.6%1.80
28.8%
0.0%24.7%
0.0%
0.0%28.8%
28.8%2.0%3.8x
2014
Sensitivity Analysis
Gross Asset Value Add: Cash & Equivalents Less: Debt Net Asset Value (NAV) No. of units
Fair Value per Unit (US$)
Post Money Valuation
1,991,373,121100,000
- 1,991,473,121
33,676,000
59.14
1.00%1.50%2.00%2.50%3.00%
68.7269.9171.1572.4573.79
1.60
57.3558.2359.1460.0861.06
1.80
52.6553.4054.1955.0055.84
1.90
48.4649.1249.8050.5151.23
2.0
1.00%1.50%2.00%2.50%3.00%
2,354,398,3982,396,147,3342,439,671,8102,485,085,988
1.60
2,314,318,0851,960,909,6581,991,473,1212,023,197,8102,056,151,186
1.80
1,931,444,810 1,798,421,3621,824,812,4941,852,155,6881,880,503,407
1.90
1,772,933,417 1,632,071,9121,654,234,8341,677,145,9971,700,843,9451,725,369,914
2.0
Comparative Valuation
We have considered eight companies providing bundled services within the telecom and cable industries. We have considered four
multiples, Price/Sales, Prices/Book Value, Price/Earnings and EV/EBITDA to compare Elevate against the selected peer group.
136,848,05533,676,000
4.06x1.01x4.09
137,760,375
Estimated Revenues Units Outstanding
Sales/unitEstimated P/SEstimated unitholder's value Market Capitalization
Valuation Metrics - Price/Sales
7,385,8505.66x
41,802,6803,704,791
-
45,507,47233,676,000
1.35
Estimated EBITDAEstimated EV/EBITDA
EVAdd: CashLess: Debt
Market ValueUnits OutstandingEstimated unitholder's value
Valuation Metrics - EV/EBITDA
0.12 14.57
1.71
57,590,615 33,676,000 Shares
Estimated Earnings Estimated Price/Earnings
Estimated unitholder's value
Market ValueUnits Outstanding
Valuation Metrics - Price/Earnings
25%25%25%25%
Weight
4.09 137,760,375
101,272,546 57,590,615 45,507,472
$ 85,532,752
3.011.711.35
$ 2.54
Price
Price/SalesPrice/Book ValuePrice/EarningsEV/Revenues
Weighted Average Price
Relative Valuation
10,099,98533,676,000
0.30x10.03x
3.01
101,272,546
Estimated Book ValueUnits Outstanding
BVPUEstimated P/B
Estimated unitholder's value
Market Capitalization
Valuation Metrics - Price/ Book
Market Cap