At the beginning of the year, we made our 2017 growth plan public.
In the spirit of continued transparency, today we are releasing our 1Q17 financial results. We’ve discussed and debated both the pros and cons of public financial reporting on startups and smaller businesses and measured the short- and long-term impact on Jakt. While in the short-run it’s tad scary and possibly unnecessary (Jakt has no outside investors), we believe the long-term benefits outweigh the cons. The biggest of which to us include holding Jakt accountable to its stakeholders (our partners, our employees and our advisors) from the very start and allowing other entrepreneurs insight into what’s usually private information.
Jakt 1Q17 Financial Results and Highlights
During 1Q17, Jakt’s revenue was $400K and slightly ahead of our $370K target. This compares to $262K during 4Q16 when the new Jakt partnership was formed. Higher revenue came primarily as a result of positive customer renewals, higher inbound sales traffic and a more focused strategy around marketing and business development. Gross margin improved to 58.6% in 1Q17 from 18.4% in 4Q16 and 40.1% for 2016. This too was driven by customer renewals, including several customers increasing overall spend with Jakt. Operating margin improved to 36.8% from a net operating loss in 4Q16 and 18.5% in 2016, primarily as a result of higher sales.
Lower sales, margins and the net loss in 4Q16 was a result of integrating new teammates, along with branding and positioning initiatives which distracted our sales effort. Operating margin in 1Q17 was well ahead of our medium-term goal of 25%. We expect operating costs to increase disproportionately to sales in 2017 due to headcount growth. Cash flow from operations was $136K and ahead of our $105K target. Capital expenditures at Jakt are minimal. At the end of 1Q17 Jakt had no debt and $163K in cash. Lastly, company-wide employee utilization (excluding contract workers) was 61% compared to our medium-term goal of 75%-85%. Jakt currently has 14 teammates in total.
During the quarter Jakt continued to improve its service offering which caters to startups, growth-stage companies, and innovative larger brands. Our product offering focuses primarily on digital user experience and software development, with a growing presence in brand strategy and growth marketing. Our customers, which we refer to as our partners, are spread across both the consumer and b2b industries.
We are sector agnostic with current projects in business services, real estate, education, transportation, health and beauty, wellness, CPG, and media. While most of our partners are still focused on mobile, they are increasingly exploring new interfaces such as text and voice vs. mobile apps (iOS and Android). We will continue to evolve and enhance our service offering in 2017 including initiatives in branding, growth, analytics, AI, and machine learning. Additionally, we will continue to explore efficiencies in sales and marketing, business development, and project production.
We’re pleased with our first quarter results and will continue investing in Jakt’s growth during 2017. Our 2017 targets are $2M in revenue and 30% operating margin. Jakt is a project-based business and revenue can be unpredictable from quarter to quarter. Key risks include sales predictability and employee utilization.
Jakt 2Q17 Financial Results and Highlights
During the second quarter of 2017 (2Q17), Jakt’s revenue was $506K and just ahead of our $492K target. This compares to $295K during 2Q16 (+71% YoY) and $392K during 1Q17 (+29% QoQ). Higher revenue came both from positive customer renewals and higher inbound sales traffic. The higher incoming sales traffic resulted from a more strategic approach to sales funnel creation and conversion, increased marketing efforts, and partnerships between Jakt and other digital agencies and venture capital firms.
Gross margin of 50.7% in 2Q17 was flat with 2Q16 and below 57.7% in 1Q17. Gross margin declined sequentially due to higher employee costs in June relative to the first two months of the quarter. Operating margin of 32.4% compared to a net operating loss during 2Q16 and 37.0% during 1Q17. Lower operating margin during the second quarter compared to the first quarter of this year was the result of lower gross margin. Operating margin of 30%-plus is trending ahead of our medium-term goal of 25%. We still expect operating costs to increase disproportionately to revenue in 2017 due to headcount growth and increased sales and marketing spend. Cash flow from operations was $123K and ahead of our $105K target and in-line with 1Q17.
Capital expenditures at Jakt are minimal. At the end of 2Q17 Jakt had no debt and $302K in cash. Lastly, company-wide employee utilization (excluding contract workers) was 51% compared to 61% during the first quarter of 2017. During the month of June and into July, Jakt increased its headcount in preparation for the start of several new projects. At the same time, several existing large projects ended, resulting in lower June revenue relative to May and lower utilization. Our medium-term utilization goal stands 75%-85%. Jakt currently has 16 teammates in total up from 14 in 1Q17.
Jakt continues to improve its service offering which caters to startups, growth-stage companies, and innovative larger brands. Our product offering focuses primarily on digital user experience and software development, with a growing presence in brand strategy and growth marketing. During the quarter, Jakt saw an increase in branding and user experience design projects relative to software development. Still, our software development business remains healthy and growing with most of our projects involving both design and development.
Relative to other agencies which tend to focus in one critical area such as branding, design, development, or marketing, Jakt concentrates instead on the entire customer (user) journey from end-to-end. Our multi-disciplinary team and approach gives our partners a more cohesive experience and allows us to make informed, data-driven decisions within whichever critical area matters most for ultimate success. While most of our partners are still focused on mobile, they are increasingly exploring new interfaces such as text and voice vs. mobile apps (iOS and Android).
During the quarter and heading into July, we are seeing a slight increase in B2B work relative to consumer. By industry, we are seeing an increase in medical and health. We will continue to evolve and enhance our service offering in 2017 including initiatives in branding, growth, analytics, Artificial Intelligence, and machine learning. Specifically, during 2Q17, we saw an increase in Artificial Intelligence work; an area we’re particularly excited about.
Overall, we’re pleased with our second quarter results and will continue investing in Jakt’s growth during 2017.
Over the next 3–5 years, our top priority is to continuously improve our process. We are focused on research, data, and impact. Our services aim to make our partners more successful through creative, innovative digital experiences. We are a mission-driven organization that believes in people. Our long-term (10-year) goal is to impact the lives of 100M people through the solutions we help create with our partners.
This post initially appeared in our Short Stack newsletter. Join thousands of others interested in technology, innovation and what it looks like to build a company by signing up now.