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TechCommunity: Donkey Republic did it right when they turned COVID-19 downturn into growth

Crises, as we know, separate the sheep from the goats. Even though Donkey Republic’s 2020 financial statements showed a significant drop in revenue, the micromobility company has still managed to survive the corona crisis, writes Anders Egsvang in this TechCommunity post.

Anders Egsvang Rasmussen is an investor, educator and analyst who makes us smarter about what’s up and down when startups do on the stock market. He currently runs AE Investment Research, which provides analysis and helps investors find good investment opportunities in the market, focusing on quality companies.

Donkey Republic has recently delivered their first annual report as a publicly listed company. A financial statement that is interesting due to several parameters and where the effect of COVID-19 has been overriding.

The pandemic has been harder on some companies than others. Norwegian was on the brink of bankruptcy after the world shut down and air traffic almost hit zero. Zoom, on the other hand, grew as COVID-19 spread because their product became more and more important.

One of the Danish listed growth companies, Donkey Republic, also experienced a major impact from COVID-19. When the pandemic broke out, tourists accounted for over 33 percent of the turnover of Donkey Republic’s business. By 2020, activity from tourists was lower and lower as COVID-19 spread. Donkey Republic therefore came out of 2020 with a 34 percent decline in revenue. This decrease was mainly due to fewer tourists, as local users of Donkey Republic remained fairly stable despite homework and facility closures in 2020.

Global tourism. Source: Statista

Crises shake the market and separate the sheep from the goats, and Donkey Republic, beyond the accounting shock of COVID-19, has used this challenge wisely. In 2021, they come out with +73% revenue growth compared to 2020 and +11% compared to 2019. This is interesting because the first half of 2021 was still marked by low activity and pandemic, while 2019 was a full year without pandemic.

For Donkey Republic, this has been possible because during a time of COVID-19, their focus shifted to focusing on their local users. The period of pandemic has proven that Donkey Republic has a stable local user base which generates a stable income. The company has also shown that they can operate in a difficult market, and for Donkey Republic, COVID-19 was the ultimate hardship to face when you have over 33% of your revenue coming from a user base that disappears overnight with a snap.

Confidence in management’s ability to deliver

At AE Investment Research, we conducted a survey of our affiliated investors. Among other things, it shows that trust in management is clearly the most important thing before an investor chooses to invest in a company. As many as 85 percent believe it is important to have confidence in management.

The development Donkey Republic has enjoyed in the period of COVID-19 must, all other things being equal, be attributed to the management’s ability to execute. As mentioned at the outset, the impact of COVID-19 varies widely, but at the same time, how companies act under pressure also varies widely.

Source: Donkey Republic

Some companies use COVID-19 as an explanation for decline, while others use this new situation as an opportunity to change with the market. Donkey Republic could have chosen to continue as before COVID-19, and then in 2021 we would have had completely different figures to look at. They could have chosen to save on marketing because the number of tourists was so low. They could have chosen to have the same focus in 2021 as in 2019, when the world looked different.

Jeff Bezos, founder of Amazon, once said that what a senior executive in a company gets paid for is making few but good decisions. One of the decisions Donkey’s leadership made in 2021 was to introduce “Day deals” that lifted the value of each user while giving the user a discount. Win win for both parties.

It may be a simple decision, but an important one when faced with a pandemic and having to service the smaller user base that suddenly exists when the world shuts down. This is one reason Donkey may come out of 2021 with 11 percent revenue growth compared to 2019, even though the number of bikes hasn’t changed.

From an investor’s point of view, I think management has proven they can execute and act in difficult situations. That raises confidence in management’s abilities. The sharp accounting analyst, would then perhaps question the loss the company is making. The management may be able to grow the top line, but what about the bottom line, can it be in the black?

A fixed cost business

Donkey Republic’s loss in 2021 was about -50% compared to revenue, although operationally the company generated about €700,000 in operating profit, NOT including fixed costs. What does it mean?

Donkey Republic has what they call “Headquarter costs,” which are fixed costs that don’t vary based on how many rides are taken on a Donkey bike, how many customers they have, or anything else. These are costs that cover, for example, software and hardware development that have nothing to do with current operations but are intended to ensure future value and growth.

Right now, these costs are rising because the company is hiring and scaling up their headquarters after capital from the IPO in the spring of 2021. In a fixed cost business, you can’t be fooled by the company’s shortfall. Just because the company is delivering a loss does not mean the business is not profitable. It simply means that the company’s turnover is not currently high enough to cover its fixed costs. Therefore, it may be a good idea to separate fixed costs from operating costs to see if there is a likelihood that the company will become profitable in the future.

If we take fixed costs off the balance sheet entirely and look only at operating costs, Donkey Republic delivered an operating profit of 13.5 percent of revenue in 2021. Of course, there will always be fixed costs, and so we cannot take them off the balance sheet entirely, but as the company grows, fixed costs will become a smaller and smaller part of total expenses. Eventually, the turnover may become so high that it covers the fixed costs and the company starts delivering profit from there.

Donkey Republic itself expects this point to be reached in 2024, when turnover is expected to reach DKK 200 million, which would then be the first year of profit.

Not that Amazon and Donkey Republic are comparable, but Amazon had the same challenge when it started. They delivered losses for many years until revenue and scale were large enough to cover overheads. Since then, the margins and profits of the company have grown and grown. Margins have probably not peaked yet and will continue to grow as turnover grows. It may be difficult to assess now what the situation will be in five years’ time, but as an investor it is important to look at what has to do with operations and what has to do with development.

Amazon shares, 1997-2011. Source: Tradingview

In 2000, Amazon delivered a loss of $1.4 billion, equivalent to -50% of revenue. There was a long way to profit if you looked at that loss. Already in 2002 the profit margin had improved to -4 percent and in 2003 Amazon made its first profit. The big difference between 2000 and 2003 was that Amazon invested in both technological development, expansion of their warehouse capacity and improvement, as well as expansion of their packaging and handling processes. It was a large expense to make this investment, but the expense peaked in 2000, and in subsequent years as revenue grew and the company was able to handle greater and greater volume due to these investments, the expense remained fixed. In fact, it decreased for several years.

Amazon was thus a fixed cost business. It could make money operationally, but it cost money to get bigger, and it was an investment that benefited investors, even if not all investors and analysts could see that in 2000. Some may remember what happened in 2000. The IT bubble burst and although Amazon is today the fourth largest company in the world and Jeff Bezos has been the world’s richest man several times, Amazon’s stock fell by -95% in 2000.

“Ouch” was the first sentence Jeff Bezos wrote in Amazon’s annual report for 2000.

Amazon and Donkey Republic, as I said, are not comparable. They are two very different companies and two very different sizes. Donkey Republic will never reach the size Amazon has today, but it doesn’t have to. The important thing is to look at the expenses that drag down Donkey’s profits, with the bulk of those expenses being fixed costs that go to development and technology.

Donkey Republic’s expectation of profit by 2024 is therefore not unrealistic, because operationally they are actually already profitable. Now it’s all about scale and growth.

Disclaimer: Anders Egsvang has shares in Donkey Republic, but this is not a buy or sell recommendation.

The post TechCommunity: Donkey Republic did it right when they turned COVID-19 downturn into growth appeared first on startupmafia.eu.

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