jSpan Corporation is an ASP that provides remote access. jSpan allows independent professionals and small to medium businesses to have the same information access previously available in an enterprise environment.
7.1 Important Assumptions
- jSpan Corporation assumes a constant price of $25 per month over the forecast period. The price for the service may decline over time; however, the addition of premium subscriptions and value added services will compensate for the price degradation. Approximately 15% of revenue will be shared with jSpan partners. Shared revenue is treated as a discount on the $25 price, resulting in per user revenue of $21.25 per month.
- Under COGS, direct material cost is estimated based on the cost of bandwidth, monthly operational costs and licensing costs. An average cost and performance of T1 lines is used to approximate the cost of bandwidth. Operational costs are expected to be similar to the cost of customer care for Internet Service Providers, $3 to $7.50. Software will be licensed and other software added as value added services. Total per unit direct material cost is estimated at $6.50 for years one and two, $6, $5.50 and $5 for years three, four, and five, respectively. The drop in cost is due to the realization of economies of scale.
- Employee salaries increase annually by 5%. Initial salaries may be somewhat lower than forecast, but will include options.
- Operational hardware is leased on a 3-year capital lease. Some portion of this hardware may be purchased depending on the terms jSpan is able to negotiate. Hardware requirements are based on the number of servers and routers needed to support 2,000 users. The hardware cost per 2,000 users is estimated at $130,000 for years one and two, dropping to $65,000 for years three, four and five.
- All capital purchases (hardware, software, furniture and fixtures) are depreciated over three years.
21 The Infrastructure Report: Internet Service Provider Industry Overview, Credit Suisse First Boston Corporation, December 1998.
7.2 Financing Plan
The management estimates that achieving forecast results will require approximately $14.9 million in capital. Break-even operations are anticipated in the second quarter of FY 2003, at which time gross revenues will be approaching a $109 million annual run rate, and gross margin contribution of 64%.
jSpan Corporation has either completed or anticipates funding the above capital requirement as follows:
- Seed, June, 1999 — $500,000
- Series A, January, 2000 — $3,200,000
- Series B, October, 2000 — $11,200.000
- Total — $14,900,000
7.3 Exit Strategy
By consolidating the highly fragmented market for independent professionals and businesses, jSpan is a potential acquisition target for corporations that offer goods and services to this market segment. Research indicates that recent acquisitions value qualified users between $300 and $500 per user. The interactive nature of the jSpan service is such that the value is likely to fall near the upper end of the range. Based on a $450 per user price, a conservative estimate is an acquisition value of approximately $105 million at the end of year three, increasing to over $1 billion by the end of year five. Successful diversification into related market segments could substantially increase the value of the corporation by exceeding the projected number of user accounts. The result would be a higher acquisition value or a potential public stock offering.
7.4 Projected Profit and Loss
The following table presents the projected profit and loss.
7.5 Projected Cash Flow
The Cash Flow chart and table are shown below.
7.6 Projected Balance Sheet
The Balance Sheet follows.
7.7 Business Ratios
Standard business ratios are presented below, as well as comparative information for S.I.C code 7375, Computer Programming, Data Processing, And Information Retrieval Services.