Author Topic: revenue per employee  (Read 10954 times)

Fred93

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revenue per employee
« on: June 15, 2016, 03:17:13 AM »
Tonite I was thinking about my model for LC's recovery, and stock valuation post-recovery.  (I will mention, just so there's no confusion, that this analysis has no conclusion at this time.  I can't figure out what the company is worth.)

I got to thinking about employees.  As some of you know, I've advocated that LC should reduce staff size, immediately, to get costs under control for the new reality of a 1 to 2 quarter originations dip, and slower growth in the next few years.

That's just background on how I got here.  Once here, I looked at some benchmarking.  Revenue/employee is a measure of efficiency.  (You are free to like or dislike this particular measure.  I'm just showing you the numbers.)

Revenue and employee numbers are published for both Prosper and LC in their SEC 10K filings.  Most recent is for FY2015 which happens to also be CY2015.

Prosper: revenue $204,275,000, employees 619, revenue/employee = $330,008
LC: revenue $429,624,000, employees 1382, revenue/employee = $310,924

Ok, so then I checked revenue/employee at some banks, credit card companies, and whatnot.  These guys don't all have the same business model, so direct comparisons aren't an absolute measure of anything.  This list just gives you the lay of the land.

B of NY Mellon $294,400
Citi $321,100
Ondeck $381,100
Bank of America $383,300
JPM Chase $390,600
Capital One $523,700
Western Union $546,100
Paypal $574,700
Discover Financial $584,700
Am Express $601,400
Goldman Sachs $809,800

First thing I notice is that LC and Prosper are down there among the ordinary old banks.  The story that both LC and Prosper like to tell is that they're so much more efficient because of their use of modern technology.  Gosh you might expect that would mean they would need fewer people to accomplish the same thing.  Some of that is surely true, but at the end of the day, it isn't visible from this view.  They use about as many employees as BofA or BofNY or Citi to make each dollar of revenue.  Bummer.

They have more work to do before their technological efficiencies give them an obvious numerical advantage. 

I'm thinking that part of the problem is rapid growth.  LC and Prosper have been growing nearly 100%/year, while those big banks have been growing single digits.  When growing you need more sales employees to rev up sales for next year, and more engineering employees to get ready to handle the increased volume, etc.  Also there's a little math thing that happens when you grow fast.  The revenue is whole-year, but the employee number published in the 10K is end-of-year, which is higher than the average employee count that generated that revenue.  This is probably worth a factor of 1.2 to 1.3 .  1.3x would move LC's revenue/employee up to $416,000 .   Still doesn't exactly beat up all the banks!

Perhaps after accepting slower growth in the near future, some increased efficiency follows naturally.  Not automatic, for sure, but perhaps natural, if you accept slower growth, and plan to be efficient under the presumption of slower growth.

FYI, you can find revenue/employee quickly for many companies using Wolfram Alpha, like this...
http://www.wolframalpha.com/input/?i=paypal+revenue+per+employee
« Last Edit: June 15, 2016, 03:24:39 AM by Fred93 »

rawraw

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Re: revenue per employee
« Reply #1 on: June 15, 2016, 03:57:22 AM »
I'm not so sure if measuring revenue per employee is all that useful, especially trying to compare it to rather mature peers.  Are employees or revenues growing faster at LC?

dompazz

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Re: revenue per employee
« Reply #2 on: June 15, 2016, 08:46:05 AM »
I'm not so sure if measuring revenue per employee is all that useful, especially trying to compare it to rather mature peers.  Are employees or revenues growing faster at LC?
This quarter, I'm going to guess both are negative and revenue is more negative. ;)

I like employees as it is a decent proxy for variable costs.

I agree it can be problematic comparing a growth company (that is shrinking) to stable companies this way.  But I also like Fred93's multiplier -- even if it is just a SWAG. 

LC sells an investment product, maybe we should be comparing them to asset managers.  Blackrock at $869K per employee, Janus $834K, Invesco $767K, Oaktree Capital $439K, ...

lascott

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Re: revenue per employee
« Reply #3 on: June 15, 2016, 10:08:51 AM »
I got to thinking about employees.  As some of you know, I've advocated that LC should reduce staff size, immediately, to get costs under control for the new reality of a 1 to 2 quarter originations dip, and slower growth in the next few years.
I'd rather keep the employees unless there are some poor performers that are now under stressful times being negative and bringing others down.  It takes several months to bring new employees up to speed and depending on their job and experience the existing employees are a lot more productive and have a lot of key insight that help things run smoothly. They have a lot of *subtle* knowledge based on experience.

I've been around enough to see companies take an 'easy' way out to cut expenses by employees (even very good ones) that it causes a lot more problems than solves. Problems can be moral and impact to remaining workers to do more at the same time training new folks that eventually come in.  Also if you viewed very many of LCs youtube videos they have a culture they try to maintain that is positive, hardworking, competitive, and still fun. If you haven't watched their videos they are worth getting a *hint* at another aspect of the company.
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LonghornSF

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Re: revenue per employee
« Reply #4 on: June 15, 2016, 10:55:23 AM »
The only metric that really matters is customer acquisition cost. The employee cost is largely fixed and per employee costs should decline as / if the company scales. My big concern has always been that customer acquisition costs are too high for these companies to earn a decent profit. If it takes 3% of principal to acquire a customer and your revenue is only 3.5% of principal, that's not a huge spread to cover their very substantial overhead costs.

If LC were smart, they would look into relocating their call center and other back office assets to a lower cost of living city. Prosper already did this with their Phoenix office. It's insane that they're running a call center out of downtown SF.

Fred93

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Re: revenue per employee
« Reply #5 on: June 15, 2016, 08:59:29 PM »
The only metric that really matters is customer acquisition cost. ... If it takes 3% of principal to acquire a customer and your revenue is only 3.5% of principal, that's not a huge spread to cover their very substantial overhead costs.

In Q1, 10Q says "In the first quarter of 2016, our marketplace facilitated approximately $2.8 billion of loan originations" and the consolidated statement of operations says there was $151,265,000 of operating revenue.

$151,265,000 / $2,800,000,000 = 5.4%

So revenue is running above 5% of principal.

I understand your point.  I'm just interceding with the facts.

Fred

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Re: revenue per employee
« Reply #6 on: June 15, 2016, 10:48:07 PM »
The only metric that really matters is customer acquisition cost.

IMO, the only metric that matters is ... profit.

LonghornSF

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Re: revenue per employee
« Reply #7 on: June 16, 2016, 12:58:17 AM »
Quote
In Q1, 10Q says "In the first quarter of 2016, our marketplace facilitated approximately $2.8 billion of loan originations" and the consolidated statement of operations says there was $151,265,000 of operating revenue.

$151,265,000 / $2,800,000,000 = 5.4%

So revenue is running above 5% of principal.

I understand your point.  I'm just interceding with the facts.

Let's rerun the calculation in a more sensible way.

LC's origination fees in 1Q16 were $125mn on $2.8bn of origination, for an average origination fee of 4.5%.  But wait, origination and marketing cost them $86mn, or 3% of origination. Subtracting that out, LC's net origination spread is 1.5%. They're making 1.5% on every burger they sell.

In 1Q16 they sold $2.8bn in burgers, but only made $39mn in gross profit. But wait, they still have to pay the cooks in the kitchen and the CEO on his sailboat. The cooks, which in San Francisco are called engineers and developers, cost $24mn in 1Q16. The captain and his officers cost $38mn in "other general and administrative costs." So the captain and his cooks had $62mn in overhead.

So it turns you sold $2.8 billion in burgers, made 39mn in gross profit, and lost $23mn after paying the cooks and Renaud the sailboat captain. Would you invest in this Burger King franchise?



Fred93

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Re: revenue per employee
« Reply #8 on: June 16, 2016, 01:20:26 AM »
Let's rerun the calculation in a more sensible way.

I'm not sure your calculation is more "sensible".  It is just different.  You chose to leave out some revenue, such as management fees, etc. That's real revenue, so why leave it out?  I avoided calculating profit, because I can see that the company has been investing heavily in growth, which has "used up" money that would have gone to profit.  However, we all end up the same place.

I was just trying to address one point, not everything that goes into making the eventual profit.  RL has this famous viewgraph he has shown us over and over where he claims to have lower costs than banks.  On this particular measure (revenue per employee), his costs don't look lower than banks.  I haven't tried to figure out every way you can measure.  Can anyone validate the various costs he shows on that chart?

By the way, there's a big financial times story today that BofA is preparing to layoff another 8,000.  They've laid off 60,000 since 2009.  The article says because of electronic banking, they don't need so many bank tellers any more.  You don't say.  Wait... Banks are getting more efficient?

I think you and I are trying to say similar things.  There's seems to be a fundamental difficulty, or at least a fundamental issue that has not yet been demonstrated.  This operation doesn't seem efficient enough, so it is difficult to see how it will scale to high profits.  Seems like they should either make more money on each loan, or find a lower cost sourcing of borrowers, or use their technology to operate with fewer cooks in the kitchen, or all of the above.

Quote
Would you invest in this Burger King franchise?

I'm buyin' the burgers, but not the common stock.   I keep scratchin' my head about the stock tho.

Fred93

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Re: revenue per employee
« Reply #9 on: June 16, 2016, 05:15:29 AM »
Here's that viewgraph showing that LC's operating expenses are all smaller than the banks'.  Has anyone tried to validate any of these items?  (ie estimate the cost of these items one by one either at banks or at LC?)


LonghornSF

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Re: revenue per employee
« Reply #10 on: June 16, 2016, 09:46:38 AM »
Quote
I'm not sure your calculation is more "sensible".  It is just different.  You chose to leave out some revenue, such as management fees, etc. That's real revenue, so why leave it out?

Include the servicing fees and they're still losing money.


Quote
I avoided calculating profit, because I can see that the company has been investing heavily in growth, which has "used up" money that would have gone to profit. 

If Burger King stops advertising, its burger sales go down and so does profit. LC likes to perpetuate this myth that if they just stopped marketing the profits would roll in. They can't do that though. If LC reduces marketing spend origination volumes will fall off a cliff.


Quote
Here's that viewgraph showing that LC's operating expenses are all smaller than the banks'.  Has anyone tried to validate any of these items?

Keep in mind that LC had the stats produced by McKinsey in the run up to their IPO. Do you think McKinsey, which presumably has received a lot of business from LC and wanted to receive even more in the future, was going to produce a negative report? The same McKinsey whose engagement partner just joined LC as COO? I would be very skeptical.


Fred93

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Re: revenue per employee
« Reply #11 on: June 16, 2016, 03:00:19 PM »
Quote
I avoided calculating profit, because I can see that the company has been investing heavily in growth, which has "used up" money that would have gone to profit. 

If Burger King stops advertising, its burger sales go down and so does profit. LC likes to perpetuate this myth that if they just stopped marketing the profits would roll in. They can't do that though. If LC reduces marketing spend origination volumes will fall off a cliff.

I don't know why you're attributing something to LC, as in "LC likes to perpetuate this myth".  I am speaking with my own voice, not LC's.  I've never heard LC say anything like this.  What I said is something a little different.  I said that LC has been spending enough marketing etc to roughly DOUBLE their business every year.  If they set lower growth goals, like maybe staying flat or growing 10%/year, then they could accomplish this with a much smaller marketing spend.  I didn't use the words "stop marketing" or "roll in".


Quote
Quote
Here's that viewgraph showing that LC's operating expenses are all smaller than the banks'.  Has anyone tried to validate any of these items?

Keep in mind that LC had the stats produced by McKinsey in the run up to their IPO. Do you think McKinsey, which presumably has received a lot of business from LC and wanted to receive even more in the future, was going to produce a negative report? The same McKinsey whose engagement partner just joined LC as COO? I would be very skeptical.

I don't know anything about McKinsey.  I didn't ask you to blindly believe the numbers on that viewgraph.  I asked explicitly whether anyone had tried to validate any of those numbers.   Got no answer, so I'm thinking the answer is no.

rawraw

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revenue per employee
« Reply #12 on: June 16, 2016, 03:23:10 PM »
Lending Club is making a cost claim but you're using a revenue metric to guage if it's true? Revenue could be less per employee but costs are lower due to other variables.  I'm just not following.
 
I don't think McKinsey would have their status if they just gave analysis people paid for, as your suggesting

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« Last Edit: June 16, 2016, 03:25:10 PM by rawraw »

Fred93

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Re: revenue per employee
« Reply #13 on: June 16, 2016, 03:49:34 PM »
Lending Club is making a cost claim but you're using a revenue metric to guage if it's true?

No.  I didn't say that.  I'm trying to understand costs.  Employees are costs.   You are presuming arguments I have not made.

 
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I don't think McKinsey would have their status if they just gave analysis people paid for, as your suggesting
I didn't suggest any such thing.  I don't know beans about McKinsey or their "status", and don't care about their status.

I asked whether anyone had tried to validate the numbers presented in the viewgraph.

nonattender

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Re: revenue per employee
« Reply #14 on: June 16, 2016, 03:55:46 PM »
Tonite I was thinking about my model for LC's recovery, and stock valuation post-recovery.  (I will mention, just so there's no confusion, that this analysis has no conclusion at this time.  I can't figure out what the company is worth.)

That's ok, no one else can, either - and there's debate about what business they're in, to boot.  They bought more loans last week - burgers, if you prefer.  They're now stockpiling burgers.  This is not dissimilar to what I have always imagined that McDonald's does.
A little nonsense now and then is relished by the wisest men.