SoundCloud, the Berlin-based music service founded by Swedes Eric Wahlforss and Alexander Ljung, has according to Music Business Worldwide reached the ‘first level’ of profitability: EBITDA profitability (Earnings Before Interest, Taxes, Depreciation and Amortization). On ca €288 million in revenue and a 36.1 % gross margin, it’s a strong improvement from -€29 million in 2022 to €2 million in EBITDA in 2023. Big congrats to the team!
Evaluating the quality of a company’s profitability is not entirely straight-forward, but EBITDA is in my book the ‘first level’ to evaluate company-wide profitability.
EBITDA is a metric that doesn’t cover all costs (which it clearly says) and depending on accounting rules, EBITDA might more or less show underlying operational profitability before financing costs (interest) and tax.
One argument to use EBITDA for software companies is that depreciation of intangible assets (like software) is not a cash cost in a particular reporting period and thus it is fine to exclude it together with financing costs as investors want to evaluate cash from operations. The problem is that salaries for developing new software is likely excluded from the costs used to calculate EBITDA (as they are activated) and at some point the costs should show up in a profitability calculation. Which they roughly do when looking at EBITA profitability (Earnings Before Interest, Taxes and Amortization)
Understanding the true quality of profitability requires looking at multiple metrics including accounting profitability (EBITDA, EBITA, Net Profit), cash flow (operating cash flow and free cash flow) and profitability metrics like Return on Equity. As the late Charlie Munger said: “It’s not supposed to be easy. Anyone who finds it easy is stupid.”
