This addendum is a research-subscribers-only update to our October report, A Deep Dive into Oyo 2019: The World’s Fastest Growing Hotel Chain.
Estimating the performance of a privately held company is necessarily an inexact science. And given that Oyo released new filings this November in connection with its latest Series F equity issuance, Skift Research is committed to fine tuning our estimates as new information comes to light. The goal with this, and future updates, is to dial into the best set of private company estimates available.
Oyo released new filings this November in connection with its latest Series F equity issuance. These documents include shareholdings, income statements, and segment results that will allow us to update our financial estimates released in our October report, A Deep Dive into Oyo 2019: The World’s Fastest Growing Hotel Chain.
Estimating the performance of a privately held company is necessarily an inexact science. We are making educated forecasts based on the documents we have reviewed, and rather than letting our numbers go stale, Skift Research is committed to fine-tuning our estimates as new information comes to light. The goal with this, and future updates, is to dial into the best set of private company estimates available.
The newly released documents lead us to update two parts of our report: our income statement forecasts for 2019 and 2020 and our company valuation estimate. In addition, we are able to introduce a new estimate for the size of Oyo’s China business.
Here’s what we learned:
- Oyo’s losses are much larger than expected and its operating margin is deteriorating; we had expected operating margin losses to remain negative, but become less negative.
- Oyo India and Rest of World ex-China posted a $358 million EBITDA (earnings before interest, taxes, depreciation, and amortization) loss in fiscal 2019 (12 months ended March 2019), a -35% margin. We now expect that to grow to a $1 billion EBITDA loss by fiscal 2020 (12 months ended March 2020), a -52% margin.
- Oyo’s revenue is growing much faster than we expected, at a rate of 350% in fiscal 2019. Clearly, when paired with the above, it shows that Oyo has been taking a ‘damn the torpedoes, full speed ahead’ approach to scaling.
- Given that this is historical data, it remains to be seen if the late-2019 implosion of WeWork, which followed a similar strategy, will cause Oyo to change course into the new year.
- Oyo’s latest valuation was widely reported as $10 billion, but that appears to be incorrect. We believe that Oyo’s latest $1.5 billion Series F round valued the company at a $6.5 billion pre-money valuation.
- Breakdowns of the business by geography show that the China business lost $175 million in EBITDA in the second half of calendar 2019, 39% of company-wide losses.
- China also accounted for 25% of company-wide contribution margin in the second half of calendar 2019.
- Using these figures as a benchmark, the total company including China did $1.4 billion of revenue in fiscal 2019 and is on track for $3.5 billion in fiscal 2020, 157% growth.
- We also expect that the total company lost $587 million in EBITDA for fiscal 2019 and that losses could expand to $2.8 billion by fiscal 2020. That would see EBITDA margins fall from -43% to -70%.
Income Statement Updates
Oyo released new financial statements that include company performance for the 12 months ended March 2018, the 12 months ended March 2019, and the 3 months ended June 2019.
We begin by comparing where this latest filing overlaps with previous documents to ensure that we are looking at the same numbers. We compare the fiscal 2018 results across the old and the new filings and get both good and bad news.
The good news is that operating income, pre-tax profit, and net income all tie, giving us confidence that these financials (which are not always clearly marked in the government filings) are for the same organization (which is India and rest of world ex-China) and that comparisons with our historical data are mostly valid.
But here’s the tricky part — the new filings show revenue and operating expenses, both higher than the old filings by $155 million. Because the top-line and the expenses increased by the same amount, the net result on dollar profitability is a wash. But this change to the accounting will make some of the margin and growth percentages non-comparable with our old model. This difference is primarily due to a shift from net revenue accounting in our historical numbers to gross revenue accounting in these new figures.
Nonetheless, let’s look at what the new filings tell us about how Oyo performed in fiscal 2019 and the start of calendar 2019.
Oyo’s profitability, excluding China, appears to have deteriorated in a dramatic fashion, going from a $51 million EBITDA loss in fiscal 2018, to a $358 million EBITDA loss in fiscal 2019. The latest historical data shows no sign of this trend stopping with the company reporting an $197 million loss in its first fiscal quarter of 2020 (3 months ended June 2019).
These latest filings, when combined with our previous work, imply that Oyo is on track to loss $950 million on an EBITDA basis for the full calendar year 2019 (12 months ended December 31, 2019).
Perhaps worse is that Oyo is seeing its operating margin and net income margin continue to fall even further into the negative. This is disappointing as the company’s 2018 annual report card had indicated “margin expansion and high degree of operating leverage” and suggested that negative margins would shrink. We had previously expected its margin to stabilize and improve to a less negative figure.
The good news is that revenue seems to be growing much quicker than we anticipated, perhaps as much as twice as fast as we initially modelled.
Clearly, the connection between higher than anticipated expenses and revenue is not a coincidence as Oyo prioritized top-line expansion over profitability. Employee expenses increased 5.8x in fiscal 2019 from fiscal 2018 as the company increased headcount. Its other operating expenses grew 4.8x as the company likely stepped up sales and marketing spend and upfront incentives to onboard hotel owners.
As such, we update our model to reflect these changes. We switch to the new accounting standard that Oyo appears to have introduced and drop non-comparable historical financials. We will do a reconciliation between the two standards should the data become available.
We now estimate that Oyo (by new accounting standards) is on track to earn $2 billion in revenue in fiscal 2020 (12 months ended March 2020) but also to generate $1 billion in operating losses. We see operating margins falling to -52% in fiscal 2020, from -35% in fiscal 2019 and -23% in fiscal 2018.
TechCrunch and many other news organizations reported Oyo’s valuation at $10 billion this summer following its latest Series F round new issuance and buybacks from founder Ritesh Agarwal. However, reviewing the documents from Oyo’s August 2019 Series F, we believe that this valuation was overstated.
Based on the filings we have reviewed, we believe that this summer Oyo raised $1.5 billion of new capital at a $6.5 billion pre-money valuation. Adding together the new capital infusion, Oyo, in our view, currently sits at an $8 billion post-money valuation.
This is certainly impressive, but still not $10 billion. The lower valuation might actually be a blessing in disguise. We wrote in our main Oyo deep dive that one of the biggest concerns we held for the company was that, even if it continued to post strong numbers, that it would never be able to grow enough to meet the massive expectations baked into a $10 billion valuation. The lower valuation gives the company more breathing room as it tries to grow into its still expensive price tag and makes it less likely to suffer a WeWork-like downward revaluation.
New Information on Geographic Breakdown and China, Previously a Black Box
The new Oyo filings also included financial projections for many of Oyo’s geographic businesses. These projections were prepared for the purposes of an appraisal and valuation, and not necessarily for management’s day-to-day operations of the business.
These paper appraisals and forecasts can be quite artificial, and management has room to put their finger on the scale of these figures. Therefore, we have little confidence in the long-term validity of these projections. But, given that management still has an obligation to provide accurate information to its auditors and investors, we do think that the short-term projections for Oyo’s geographic lines of business are worth reviewing.
We show in the exhibits below Oyo management’s estimates for property-level contribution margin, broken down by region, for the second half of 2019 and the full calendar year 2020. Contribution margin is a non-standard term and not defined in the documents. But it typically refers to revenue after segment-specific variable costs. In other words, how much each geography contributes towards covering the overall company’s fixed costs.
The data shows just how large of a contribution margin (and therefore revenue) impact India has on the overall business. It also reveals that the U.S. is now Oyo’s third-largest geography by contribution margin barely a year after entering the market. And this is despite having very few overall properties and rooms compared to its other geographic markets.
The EBITDA data shows losses in all regions, with no signs of slowing into 2020. Oyo’s losses in China stand out, at an estimated $175 million in the second half of 2019. These are 39% of all EBITDA losses despite accounting for 25% of contribution margin.
Also notable to us are the losses in both Japan segments. In particular Japan Life, Oyo’s co-living business which rents apartments for local residents, lost nearly as much as its U.S. segment and more than the company’s entire UK division. We are surprised to see such large losses at a non-core business line. The Japan co-living business recently suffered a setback as Yahoo Japan sold its minority stake in the joint venture back to Oyo. Both Oyo and Yahoo Japan are backed by Softbank.