'Rule of 40' Is in Fashion for Software --- The financial threshold is held up as a mark of success in the sector, but it often means less than it appears

"Like hemlines and haircuts, stocks go in and out of fashion. So do the ways companies communicate their performance to investors. Whatever numbers investors want to see, management will supply them, especially if they can be easily tailored to look flattering.

 

For so-called SaaS companies, selling software as a service, a favorite metric nowadays is something called the "Rule of 40." The first thing to know is it isn't a rule, because there is no standard definition for what it means. For some companies it has become a big deal to claim membership in the "Rule of 40 club" nonetheless.

 

In general, the rule holds that a company's revenue growth [1] plus its profit margin [2] should be 40% or greater. So if a company has 20% revenue growth and a 20% margin, it gets to be in the club. Same for 40% growth and no margin, or 30% growth and a 10% margin.

 

Brad Feld, a venture-capital investor, popularized this notion with a blog post back in 2015 called "The Rule of 40% For a Healthy SaaS Company." The term's first appearance in a company's Securities and Exchange Commission filing was in 2017, going by the results of a database search on the SEC's website. A 2021 study by McKinsey, the consulting giant, is credited for helping spread its usage and showed that the market rewarded companies with higher valuations if they are at or above the Rule of 40.

 

Here is where it starts to fall apart: While revenue has a standard meaning, there is no consensus on which measure of profit companies should use to calculate the margin component. Should it be operating income? Net income? Cash flow? Maybe some nonstandard version of earnings or cash flow? The numbers that companies are showing lack comparability because they aren't apples-to-apples, and the companies often don't show their math.

 

But say everyone could agree on a particular margin metric to use for the calculation. The traditional one that McKinsey recommended was free cash flow. This typically is defined as operating cash flow [3], which has a standard definition, minus capital expenditures. Even then, the metric's usefulness starts to crumble. Done this way, the rule favors companies that rely heavily on stock-based compensation to pay their employees, while punishing those that don't and instead pay more heavily in cash. That is because free cash flow, like operating cash flow, excludes stock-based pay, which is a real cost that counts in companies' reported profits.

 

David Zion, founder of Zion Research Group and a longtime accounting and tax analyst, in a December research note did his own Rule of 40 calculations for North American application-software companies with stock-market values of greater than $1 billion. For this exercise, he took the sum of revenue growth plus free-cash-flow margin using the latest reported four quarters. Of the 98 companies in the group, 33 of them met or beat the Rule of 40. However, when he adjusted free cash flow to treat stock-based pay as an expense, only 11 companies still met or beat the Rule of 40 under both methods. They included Palantir Technologies and Constellation Software.

 

At Freshworks, for instance, during the company's recent earnings call, Chief Executive Dennis Woodside said, "adding our revenue growth and free-cash-flow margin for Q3, we exceeded the Rule of 40 in the quarter." Indeed, Zion calculated that its Rule of 40 number was 41%, which put Freshworks at No. 29 on his ranking out of the 98 companies. Revenue growth was just over 20%, and so was free-cash-flow margin.

 

But when Zion adjusted Freshworks' margin figure to treat stock-based pay as an expense, its Rule of 40 number fell to 9% and its ranking dropped to No. 76. The reason: Its stock-based pay exceeded its free cash flow. In other words, if that compensation had been paid in cash instead of stock, Freshworks' free cash flow would have been negative, and its free-cash-flow margin would have been negative 11%.

 

Similarly, Workday's chief executive, Carl Eschenbach, at an investor conference last May said "we're a Rule of 40 company." Using free-cash-flow margin for the calculation, Zion showed its Rule of 40 number was 44% for the previous four quarters, but it was 26% if stock-based compensation was treated as an expense.

 

The reason that any of this matters, Zion says, is that the market has been rewarding companies with higher valuation multiples if they are at or above 40%, as McKinsey found in its study. However, it appears the market may not be distinguishing consistently between higher-quality and lower-quality Rule of 40 numbers.

 

"A big drop in the rankings for a company indicates to us that its Rule of 40 ranking is driven more by financial engineering (how employee compensation is financed) than its peers," Zion wrote in his note. Thus a big question for investors, he said, is "How much are you willing to pay for a Rule of 40 company that is primarily there because of how they've decided to finance their employees' compensation?"

 

Better yet, until there is some consensus on how to do this number, just 86 the rule." [4]

 

1. Revenue growth is the increase in a company's total revenue over a period of time. It's also known as top-line growth. 

Revenue growth is calculated by dividing the rate of increase in total revenues by the total revenues from the same period in the previous year. It can also be expressed as a percentage increase from a starting point. 

A healthy revenue growth rate is usually between 15% and 25% annually. Higher growth rates may be too much for new businesses to keep up with. 

Revenue growth is important because it can indicate a healthy and promising business. Companies with strong revenue growth can more easily access capital, which can be used for expansion and innovation. Investors are also more likely to invest in companies with consistent revenue growth. 

Some strategies for generating revenue growth include: 

• Setting goals
• Building a high-performing sales team
• Using revenue-focused marketing strategies
• Being flexible with pricing
• Continuously evolving products
• Focusing on upselling and cross-selling

2. Margin has many definitions, including:

Business: The difference between the price at which a product is sold and the costs associated with making or selling the product

3. Operating cash flow (OCF) is the cash a business generates from its regular operations over a specific period of time. It's a company's cash basis profit, as opposed to its net income, which is its accrual basis profit.

OCF can be calculated using two methods:

 

    Direct method

    Tracks cash movement using cash accounting. The formula is OCF = Cash Revenue - Operating Expenses Paid in Cash.

 

Indirect method

Adjusts net income to cash using changes to non-cash accounts. The formula is OCF = (Revenue - Cost of Sales) + Depreciation - Taxes +/- Change in Working Capital.

 

OCF is important for tracking where a business's cash is going. It can help identify if operational costs are affecting profits, and can help with inventory analysis. For example, high inventory levels can tie up cash flow, so OCF analysis can help identify slow-moving products and optimize inventory levels.

A company's free cash flow is its OCF minus any capital expenditure needed to maintain the operating efficiency of its assets. Free cash flow is the excess money a company has after maintenance spending, which it can use for expansion, debt repayment, or stock dividends.

4. 'Rule of 40' Is in Fashion for Software --- The financial threshold is held up as a mark of success in the sector, but it often means less than it appears. Weil, Jonathan. Wall Street Journal, Eastern edition; New York, N.Y.. 06 Jan 2025: B10. 

Siekdamos daugiau saugumo, gamyklos atsisako šakinių krautuvų

 „Kai kurie didžiausi Amerikos gamintojai atsitraukia nuo šakinių krautuvų.

 

 Šios transporto priemonės buvo neatsiejamos nuo gamyklų ir sandėlių daugiau, nei šimtmetį, tačiau dabar įmonės siekia dirbti „be krautuvo“, kad pagerintų našumą ir saugumą.

 

 Federalinė statistika rodo, kad kiekvienais metais apie 7500 darbuotojų sužalojami dėl susidūrimų, susijusių su šakiniais krautuvais, apsivertimais ir kitomis nelaimėmis, o beveik 100 žūsta.

 

 Mažmeninės prekybos šakinių krautuvų užsakymai 2023 m. sumažėjo 28 % – tai didžiausias metinis nuosmukis per 14 metų.

 

 Pramonės dalyviai apibūdino nuosmukį, kaip pardavimų normalizavimą po pandemijos sandėlių statybos bumo.

 

 Plastikinių vamzdžių gamintoja „Ipex“ suprojektavo jos naują gamyklą Šiaurės Karolinoje, kad kuo labiau sumažintų šakinių krautuvų naudojimą, vietoj to pasikliaudama viršutiniais kranais ir rankomis stumiamais elektriniais padėklų kėlikliais.

 

 Dėl to gamykla, kuri buvo atidaryta 2023 m., tapo saugesne, tylesne ir mažiau įtempta darbo vieta, sakė Johnny Drummondas, bendrovės gamybos direktorius.

 

 „Darbuotojai jaučiasi taip, lyg galėtų vaikščioti bet kur interjero parduotuvės aukšte ir nereikėtų ieškoti šakinių krautuvų“, – sakė Drummondas.

 

 „Mercedes-Benz“ nuo 2018 m. bando sumažinti šakinių krautuvų skaičių jos gamyklose JAV, kai kuriuos pakeisdama autonominėmis transporto priemonėmis. „Tesla“ deda panašias pastangas, jos gamyklose naudodama stumdomus vežimėlius ir, priekabas traukiančius, „vilkiklius“, kad sumažintų eismą ir sužalojimus, sakė su šiuo klausimu susipažinęs asmuo.

 

 Gamybos saugos konsultantas Larry Pearlmanas teigė, kad prieš dešimtmetį nedaug klientų ieškojo pakaitalų šakiniams krautuvams, dar vadinamiems keltuvais. Šiandien tokių yra maždaug 10 proc., ir jis tikisi, kad ši dalis išaugs, nes robotai - medžiagų vežėjai vis labiau plinta.

 

 „Retkarčiais keltuvas gali būti laikomas laisvoje patalpoje ar panašiai, bet tikrai, jei esu futuristas, matau, kad jis išnyks“, – sakė „Safety and Consulting Associates“ įkūrėjas Pearlmanas.

 

 Šakinių krautuvų gamintojas Clarkas prisiima nuopelnus už transporto priemonių išradimą XX amžiaus pradžioje, o per ateinančius dešimtmečius jos tapo pagrindiniu gamyklos elementu. Šakiniai krautuvai gali vežti, tūkstančius svarų sveriančius, krovinius ir aukštai pakelti padėklus ant sandėlio lentynų, todėl darbuotojai gali greitai perkelti didelius medžiagų kiekius.

 

 Transporto priemonės susijusios su gerai žinoma rizika. Valstybinių ir federalinių reguliavimo institucijų dokumentuose išsamiai aprašomos darbuotojų mirtys per incidentus, susijusius su šakiniais krautuvais, įskaitant tris incidentus, įvykusius 2023 m. per 21 dieną.

 

 Vienas darbuotojas žuvo, kai jį partrenkė šakinio krautuvo vairuotojas, kuriam matyti trukdė transporto priemonės bagažinės. Kitas operatorius mirė, kai jo krautuvas iškrito iš sunkvežimio, kurį jis pakrovė. Trečiasis mirė, kai jį prispaudė krautuvo kėlimo mechanizmas per incidentą, kurį policijos tyrėjas pavadino arklišku „žaidimu“.

 

 Traumos gali būti sunkios. Buvusi sandėlio darbuotoja Adelaida Anderson padavė į teismą šakinių krautuvų gamintoją Raymondą po to, kai pasakė, kad nukrito nuo vieno iš bendrovės modelių, kai šis atsitrenkė į grindų plyšį. Šakinio krautuvo vairas suspaudė Anderson kairę koją, kurią teko amputuoti žemiau kelio.

 

 Anderson tvirtino, kad šakinis krautuvas buvo sugedęs, nes jame nebuvo durelių, kurios neleistų jos išmesti. Raymondas sakė, kad federaliniai standartai įpareigoja atidaryti skyrius, kad operatoriai galėtų pabėgti avarijos metu.

 

 Po ilgus metus trukusio bylinėjimosi federalinė prisiekusiųjų komisija 2024 metais Anderson skyrė 13 mln dolerių. Raymondas, kuris atsisakė komentuoti, skundžia nuosprendį.

 

 Šakinių krautuvų gamintojai sako, kad į savo transporto priemones įtraukė daugybę saugos funkcijų. Tai gerai matomi saugos diržai, leidžiantys lengvai pamatyti, ar juos nešioja operatorius, apšvietimas, įspėjantis pėsčiuosius apie artėjantį krautuvą, ir jutikliai, kurie sulėtina transporto priemonę, prieš įvykstant susidūrimui.

 

 Gamintojai taip pat skelbia, kad laikomasi mokymo taisyklių. Pagal federalinius reglamentus reikalaujama, kad darbuotojai, prieš pradėdami dirbti su šakiniu krautuvu, būtų instruktuoti ir būtų pakartotinai įvertinti kas trejus metus.

 

 Darbuotojų saugos ir sveikatos administracija per metus pateikia maždaug 2000 baudų įmonėms, kurių mokymo programos laikomos netinkamomis.

 

 Šakinių krautuvų gamintojai teigia, kad vairuotojų kaita yra didelė ir apgailestauja dėl to, ką jie vadina nesaugaus eksploatavimo šlovinimu. Dešimtyse „TikTok“ ir „YouTube“ paskyrų yra vaizdo įrašų, kuriuose matyti, kaip vairuotojai slysta, dūžta ir numeta didelius krovinius, kurie daužosi per sandėlio grindis.

 

 Brianas Feehanas, Pramoninių sunkvežimių asociacijos, šakinių krautuvų gamintojų prekybos grupės, prezidentas, sakė, kad nepaisant po pandemijos sumažėjusių pardavimų, jis nesitiki „didelio verslo nuosmukio“.

 

 Kai kurios transporto priemones gaminančios įmonės teigia, kad paklausa keičiasi, nes klientai ieško autonominių versijų.

 

 „Whirlpool“ skalbimo mašinų gamykla Klaide, Ohajo valstijoje, pašalino šakinius krautuvus iš savo gamybos zonos ir naudoja robotus vilkikus, kad pristatytų dalis surinkimo linijos darbuotojams. Kitos įmonės gamyklos seka pavyzdžiu, sakė Kristin Day, Whirlpool JAV gamybos operacijų viceprezidentė.

 

 Ji sakė, kad vilkikai sumažino sužeidimų ir vos neįvykusių atvejų skaičių gamyklose. Jie taip pat pagerino efektyvumą, nes pristato „tinkamo dydžio“ dalių krovinius, kurių nereikia dalyti į mažesnes talpas.

 

 Brettas Woodas, „Toyota Material Handling North America“, didžiausio pasaulyje šakinių krautuvų gamintojo filialo, vadovas, teigė, kad per ateinančius 5–10 metų pramonė gali sulaukti transformacijų, ypač jei padėklus pakeis dėžės, kaip pageidaujama sandėliavimo platforma.

 

 „Kažkada galiu įsivaizduoti užsakymų rinktuvą be žmogaus, o jis turi ranką ir kyla aukštyn, automatiškai parenka dėžę ir nusileidžia su ja“, – sakė jis.

 

 „Hyster-Yale Material Handling“, gaminanti šakinius krautuvus su „Hyster“ ir „Yale“ prekių ženklais, savo gamyklose kai kurias transporto priemones pakeitė autonominiais vilkikliais, o šį žingsnį laiko atnaujinimu. Tačiau generalinis direktorius Tony Salgado sakė, kad ne kiekvienas gamintojas yra pasirengęs arba gali atlikti tokį perėjimą.

 

 „Artimoje ateityje rankiniai keltuvai bus labai paklausūs“, – sakė jis.

 

 Kol kas net įmonės, siekiančios be šakinių krautuvų statuso, vis dar pasikliauja šiomis transporto priemonėmis. „Whirlpool“ juos naudoja kai kuriose savo Klaido gamyklos dalyse, kur gabenami dideli, didelių gabaritų, daiktai.

 

 Senesnėse gamyklose, kurias valdo vamzdžių gamintojas „Ipex“, yra grindų išdėstymas ir gamybos procedūros, kurioms reikalingi šakiniai krautuvai.

 

 "Tai yra didelis iššūkis juos pašalinti", - sakė Drummondas. „Mes valgome po vieną kąsnelį.“ [1]

 

1. Factories Shift From Forklifts in Safety Push. Keilman, John.  Wall Street Journal, Eastern edition; New York, N.Y.. 06 Jan 2025: B1.

Factories Shift From Forklifts in Safety Push

"Some of America's biggest manufacturers are backing away from forklifts.

The vehicles have been integral to factories and warehouses for more than a century, but now companies are aspiring to go "forklift-free" to improve productivity and safety. 

Federal statistics show that each year around 7,500 workers are injured in forklift-related collisions, tip-overs and other mishaps, while nearly 100 are killed.

Retail orders for forklifts dropped 28% in 2023, the biggest annual decline in 14 years. 

Industry participants described the decline as a normalization of sales following the pandemic's warehouse construction boom.

Plastic-pipe manufacturer Ipex designed its new factory in North Carolina to minimize the use of forklifts, relying instead on overhead cranes and hand-pushed electric pallet jacks. 

That made the plant, which opened in 2023, a safer, quieter and less stressful workplace, said Johnny Drummond, the company's director of manufacturing.

"Employees feel like they can walk anywhere within the interior shop floor and not have to look out for forklifts," Drummond said.

Mercedes-Benz has been trying to reduce forklifts in its U.S. plants since 2018, replacing some with autonomous vehicles. Tesla is making a similar effort, using push carts and trailer-hauling "tuggers" inside its factories to cut down on traffic and injuries, a person familiar with the matter said.

Manufacturing safety consultant Larry Pearlman said that few clients a decade ago were looking for substitutes for forklifts, also known as lift trucks. Today, roughly 10% are, and he expects that portion to grow as robotic material carriers become more widespread.

"The occasional lift truck might be kept in the spare room or something, but definitely, if I'm a futurist, I see it going away," said Pearlman, founder of Safety and Consulting Associates.

Forklift manufacturer Clark takes credit for inventing the vehicles in the early 20th century, and in the decades that followed, they became a factory staple. Forklifts can carry loads that weigh thousands of pounds and lift pallets high onto warehouse shelves, allowing workers to move large amounts of material quickly.

The vehicles come with well-known risks. Documents from state and federal regulators detail the deaths of workers in forklift-related incidents, including three that happened in 2023 over the span of 21 days.

One worker was killed when he was struck by a forklift driver whose view was obstructed by the totes the vehicle carried. Another operator plunged to his death when his forklift fell from the truck he was loading. A third died when he was crushed by a forklift's lifting mechanism in an incident a police investigator labeled "horseplay."

Injuries can be severe. Former warehouse worker Adelaida Anderson sued forklift manufacturer Raymond after she said she fell from one of the company's stand-up models when it hit a crack in the floor. The forklift's steer wheel crushed Anderson's left leg, which had to be amputated below the knee.

Anderson claimed the forklift was defective because it didn't have a door that would have kept her from being ejected. Raymond said federal standards mandate open compartments so operators can escape during an emergency.

After years of litigation, a federal jury in 2024 awarded Anderson $13 million. Raymond, which declined to comment, is appealing the judgment.

Forklift makers say they added numerous safety features to their vehicles. These include high-visibility seat belts that make it easy to see whether an operator is wearing it, lighting that warns pedestrians a forklift is coming and sensors that slow the vehicle before a collision takes place.

Manufacturers also preach adherence to training rules. Federal regulations require workers to undergo instruction before they can operate a forklift, and to be re-evaluated every three years.

The Occupational Safety and Health Administration issues roughly 2,000 citations a year to companies whose training programs are deemed inadequate.

Forklift manufacturers say there is high turnover among drivers and lament what they call the glorification of unsafe operation. Dozens of TikTok and YouTube accounts feature videos showing drivers skidding, crashing and dropping oversize loads that smash across warehouse floors.

Brian Feehan, president of the Industrial Truck Association, a trade group for forklift makers, said that despite the postpandemic sales drop, he doesn't expect "a big diminishment" in the business. 

Some companies that make the vehicles say demand is shifting as customers seek autonomous versions.

Whirlpool's washing-machine factory in Clyde, Ohio, eliminated forklifts from its production area, and uses robotic tuggers to deliver parts to assembly-line workers. Other company plants are following suit, said Kristin Day, Whirlpool's vice president of U.S. manufacturing operations.

She said the tuggers have reduced injuries and near misses in the factories. They also have improved efficiency by delivering "right-sized" loads of parts that don't need to be portioned into smaller containers.

Brett Wood, chief executive of Toyota Material Handling North America, a branch of the world's biggest forklift maker, said the industry could see transformational changes in the next five to 10 years, particularly if boxes replace pallets as the preferred storage platform.

"I can picture an order picker someday without a person on it, and it's got an arm and it's going up and it's picking a box automatically and coming down with it," he said.

Hyster-Yale Materials Handling, which makes forklifts under the Hyster and Yale brands, replaced some of the vehicles with autonomous tuggers in its own factories, a move it considers an upgrade. But CEO Tony Salgado said not every manufacturer is ready or able to make such a switch.

"For the foreseeable future, manual lift trucks will be in high demand," he said.

For now, even companies aspiring to forklift-free status still rely on the vehicles. Whirlpool uses them in parts of its Clyde factory where large, bulky items are transported.

Older plants run by Ipex, the pipe maker, have floor layouts and production procedures for which forklifts are necessary.

"It's kind of a big challenge to eliminate them," Drummond said. "We take it one bite at a time."" [1]

1. Factories Shift From Forklifts in Safety Push. Keilman, John.  Wall Street Journal, Eastern edition; New York, N.Y.. 06 Jan 2025: B1.