TransferWise, one of London’s few tech unicorns, has shed some light on just how fast it’s growing and how much money it makes — or doesn’t.
The startup has filed amended accounts with Companies House showing it made a loss of £11.4 million ($16.7 million) on revenue of £9.7 million ($13.8 million) in the year to March 31 2015.
- Scroll down for a look at TransferWise’s income statements.
The loss was down to a big jump in expenses and spending. Administrative expenses rose from £3.5 million ($5 million) in 2014 to £17.8 million ($25.4 million), likely due to TransferWise’s high-profile advertising campaigns and international expansion last year. Cost of sales also jumped from £428,932 ($612,040) to £4.5 million ($6.4 million).
A spokesperson for TransferWise told BI: “These are in line with overall business growth as we expand into new markets with new currency routes.” TransferWise expanded to the US last year, as well as adding many other routes.
The business is growing fast — revenues for the year were just over five times 2014’s figure of £1.9 million ($2.7 million).
The amended accounts follow abbreviated small accounts filed over Christmas that revealed precious little about the business but suggested revenues were small.
The revenues disclosed in the updated accounts are much higher than estimates we made based on the previous accounts. TransferWise told Business Insider that the company originally filed abbreviated accounts because they were taking advantage of a rule that meant if a company qualified as “small” the year before, they can use the same exemption the next year even if revenues are above the “small” threshold.
TransferWise took advantage of the same exemption to file unaudited accounts, meaning an outside accountant hasn’t independently verified them, but it says PwC has audited its numbers internally.
So why the new “amended” accounts? A TransferWise spokesperson told BI: “There was a signature missing from the paper report filed by post in December. A signed report followed by post and the word ‘amended’ had to be added or it would have been rejected as duplicate.”
This seems a little odd, given that there are huge difference between both sets of accounts, not just a signature. The first disclosure didn’t reveal anything about turnover, costs, or profitability — it was just a brief balance sheet.
Here are the key figures from TransferWise’s amended accounts:
The legion of consumer-facing fintech companies springing up in London right now look up to TransferWise, which is the biggest and most famous of the group. Many in the sector see the company as the flag-bearer for London’s fintech scene — if not its entire technology scene. It’s one of only a handful of businesses in the capital to apparently be valued at $1 billion (£700 million) or more.
So if you’re a startup looking towards TransferWise for guidance, are these results good or bad? There are both positive and negatives in there.
First, the positives: while TransferWise made a loss, it was profitable on a gross basis (if you strip out everything bar cost of sales.) The company made a gross profit of £5.1 million ($7.2 million).
This is no mean feat, as detractors have repeatedly questioned whether TransferWise could ever be profitable given the razor-thin margins it makes on transfers (as per this graph from Goldman Sachs).
If the administrative expenses are mainly related to expansion and advertising, it shows TransferWise does have a viable business model at its heart but is just paying for growth in the short term. Jan Hammer, a partner at venture capital firm Index Ventures, told Business Insider back in October:
In terms of profitability, it’s a very well-known phenomenon in online and mobile industries that if you want to get true scale, you invest for growth. TransferWise would be profitable on their existing book of customers — because there’s a high repeat rate — if they were not choosing to invest further in customer acquisition and growth.
The cost of acquiring users is a very real and expensive outlay for startups and it’s not unusual in startup-land to be making a loss in the early years while you plough cash into building up a customer base. But there is another way of unpicking the figures that shows warning signals, both for the company and the wider market.
But there is another way of unpicking the figures that shows warning signals, both for the company and the wider market.
TransferWise’s cost of sales as a proportion of revenues rose from around a fifth in 2014 to just shy of half in 2015, raising some questions about the scalability of the business. If those are fixed costs and they keep growing at that rate, that could be a big problem.
More broadly for the fintech sector, there’s one big number that could provoke sweaty palms — £17.8 million ($25.4 million) for administrative expenses, up from just £3.5 million ($5 million) in 2014. A big chunk of that is likely to be user acquisition through things like advertising, as already mentioned.
What will worry startups is just how much you have to spend to acquired new customers if you’re a consumer-facing fintech business. A survey by EY found just 14.3% of digitally active consumers are currently using fintech. That’s a pretty small proportion considering it’s not even the entire “normal” population.
We noted before that fintech doesn’t have the same “viral” quality as social media and gaming — companies have to work very hard to win customers. TransferWise has the firepower to do just that thanks to its $58 million (£40.6 million) fundraising last year with Silicon Valley’s Andreessen Horowitz. TransferWise has raised $90 million in total funding, so it should have plenty of cash to fund these losses. Nonetheless, an £11 million loss isn’t peanuts. Many other fintech startups will look at that burn rate and wonder whether they be facing a harder slog.
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