Netflix filed its latest quarterly report last week, and we first were poking around its Commitments and Contingencies disclosures to see what leasing obligations the company might have.
Almost immediately, however, we stumbled upon a different commitment Netflix reports: streaming content obligations. That makes sense, given that Netflix has huge licensing and royalty expenses to stream all that content to its customers.
We just weren’t prepared for the staggering size of Netflix’ streaming content obligations — more than $18.6 billion dollars, as of Sept. 30.
How fast have those obligations been growing, we wondered? And were Netflix revenue and income keeping pace?
Answering those questions is actually quite easy in Calcbench. Here’s how we did it.
First, we saw that $18.6 billion amount in Netflix’ disclosures. Of course that figure is a number, so as always, we could use the Calcbench Trace feature to find where that number comes from. We simply moved our cursor over the $18.6 billion, and several boxes magically appeared. See Figure 1, below.
In the lower box, you get an option called “Show Tag History” (circled in red). Click on that option, and a display will appear that lists the values for that specific financial item as far back as Calcbench has the data. In our case here, we could see the history for “PurchaseObligation” that Netflix had reported, as far back as second quarter 2012.
We wanted more, however. So we went to the other box that magically appeared above the $18.6 billion (circled in blue) giving us the “Export History” option. We pressed that, and blammo! Calcbench downloaded all that data into an Excel spreadsheet for us.
Then we just worked in Excel to create the chart below for you to see. It shows that obligations rose by 293 percent — from $6.38 billion to $18.6 billion — over the last six years. Wow. (See Chart 1, below.)
That’s a lot of obligation, so we then wanted to see whether Netflix’s revenue and operating income were growing at comparable rates. Yes, we could use the Trace feature and Export History option two more times, but we were too lazy to do all that again twice.
Instead, we went to the Data Query Tool. There, we could set our search range for Q2-2012 through Q3-2018, and then select revenue and operating income from the choices on the Income Statement list. (See Figure 2, below.) Scroll to the bottom of the page, press the Export to Excel button, and blammo again! Now we had all the quarterly data for both items.
Then it was just a matter of putting that data on charts again. We found that revenue rose 373 percent, from $1.07 billion to $4 billion last quarter (see Chart 2, below); and operating income rose more than 800 percent — from $57.1 million to $480.7 million (see Chart 3, below).
Now, revenue and operating income do fluctuate more than streaming obligations, but that’s no surprise. Spending obligations are often dictated by contracts with orderly payment schedules, while revenue and operating income are subject to the whims of customers and changes in operations costs.
Any way you cut it, however, you have to give Netflix its due. The company might be racking up expenses at a brisk pace, but sales and income are moving even faster.
And you can confirm all that multiple ways through Calcbench.
US Bancorp filed its third-quarter earnings release on Wednesday, and we noticed something in the nitty-gritty: its net interest income rose much faster from second quarter (1.7 percent) than non-interest income (0.2 percent).
That’s not surprising, of course. The Federal Reserve has been raising interest rates slowly but surely since 2016, and one would therefore expect banks to follow suit with their rates, and see more interest income. We just hadn’t noticed that change until today. (So much financial data to read, after all.)
So we started to wonder — is that hypothesis true? Are financial firms seeing more growth in interest income than non-interest income? Are total revenues tilting that way?
Indeed they are.
We visited our handy Data Query Tool and pulled up the data for all depository institutions — a list of 853 firms ranging from publicly traded community banks all the way up to Citigroup, Bank of America, and the other big boys. Then we looked for interest income and non-interest income from first-quarter 2015 to second-quarter 2015.
Across all quarters, interest income has always been larger than non-interest income. So we also divided interest income into non-interest income, and expressed that number as a ratio. The ratio went from 1.24 at the start of 2015 to 1.42 by summer 2018.
OK, that sounds like a lot, but too many numbers make our head hurt. So we graphed them onto a chart, and got this, below.
The trend-line in red tells the tale. Interest income is pulling away from non-interest income as the primary revenue source for banks. The slope on that line is 14.5 percent. Try that on a treadmill and your hamstrings will never speak to you again.
And while we don’t show it in this chart, when you examine the changes within each year and from one year to the next (we did), that growth in interest income is accelerating. So we’ll be back in a few weeks once third-quarter numbers are completely filed with an update.
Analysts following financial firms, meanwhile, may want to contemplate what that acceleration toward interest income means.
Ah, Sears, we hardly knew ye.
No, for real — we hardly ever shop there. Then again, that seems to be the company’s fundamental problem. Nobody does.
News broke in the Wall Street Journal this week that Sears’ long-time financial lifeline Eddie Lampert — the company’s chief executive, largest shareholder, and largest creditor all rolled into one — has finally reached the end of his patience. Lampert is not planning to lend Sears any more of his hedge fund cash.
That’s grim news for Sears, since the company has a $134 million debt payment due on Oct. 15, which it can’t make without another Lampert bailout. So bankruptcy and liquidation proceedings now seem imminent.
Calcbench has decided to note the occasion with three charts.
First, in Figure 1 below, we have Sears’ cash on hand for the last 12 quarters. While the individual amounts fluctuate, the trend line in red says it all. That slope is steeper than a double-black diamond trail at a Vail ski resort.
Figure 2 shows Sears’ current assets over the same period. Assets fell 46.4 percent, from $7.22 billion to $3.87 billion. This trend line might be more like a blue square trail in Vermont, but still: if people are using ski slope metaphors to describe you financial performance, you’re losing.
And Figure 3 shows Sears’ current liabilities. Yes, liabilities have declined too, but much less (29.8 percent) than assets or cash have dropped. And heed the vertical axis: liabilities at the end of Q2 2018 were about $400 million greater than assets.
That pretty much says it all for Sears. Calcbench users can do their own financial analysis of Sears’ dismal performance by using the Company-in-Detail or Data Query pages. Just select Sears as your company to study, and you can barrel down any hill of financial data you like.
Meanwhile, like so many consumers, we’re off to look at Target and Amazon.
At Calcbench we don’t give investment advice; that’s your
job. But we like to help people make informed decisions from available data. That’s
why the Oct. 1 WSJ article about money-losing IPOs caught our eye.
“Money-losing companies are going public at a record rate as investors hunger for new issues.” Funny, they make it sound like it’s a bad thing…
But seriously, just because a company is making a loss at IPO, does that necessarily predict much? Heck, Amazon.com was making a loss at IPO.
You need to dig deepr to figure out what kind of loss the filer is making, and what it means for the future.
To discuss this, we will revisit a post we wrote when Care.com went public in 2014. And it turned out to be prescient, since the company’s stock languished well below the $17 IPO price for several years.
At the time we called it “Buying revenue at any cost… the new strategy for IPOs?’
The first time I noticed a pattern was when I was looking at Groupon’s prospectus. Then came Splunk, Yelp, and several others in the past couple of years. And just today I saw a new one… Care.com
What pattern am I talking about? Companies that spend their pre-IPO year(s) with blowout revenue growth and equally dramatic growth in their costs and losses.
This is expected from early-stage startups. But early-stage startups don’t IPO; late-stage startups do.
Increasingly it seems there is a playbook that investment bankers are selling to hot startups, that reads something like this: If you buy revenue growth at any cost, we can take you public.
Anyone who has worked in corporate finance can tell you there is revenue and there is revenue. Some is good and some is bad. Revenue that loses the company money is bad…unless you need it to make your company look like it is growing.
Here is the game in a nutshell. If your company loses money, it’s impossible to value based on profit, right? So, investors turn to revenue growth instead. But far too few investors seem to realize that revenue growth can kinda sorta be whatever the company wants. Want more revenue? Steal the market by charging
less than all of the competitors. Buy more advertising. Sell deals that cost more than they bring in. Whatever it takes. Who cares what it costs. Because investors aren’t looking at the costs.
But what should you look for to know you are not getting a raw deal?
Simple. Ignore the revenue growth. Everyone’s got that. Focus on the incremental margin:
Good companies are characterized by increasing operating leverage, also known as incremental margin. Over time, for each dollar in revenue growth, a larger portion of that dollar should fall straight to the bottom line. If this doesn’t happen, then there could be something wrong with the business model.
Let’s look at Care.com: Each $1 of revenue cost $1.47 dollars in 2011. In 2012? $1.43. How about the first 9 months of 2013? $1.42. COME ON! After revenue rose 125 percent, you couldn’t increase the incremental margin at all?
In other words, if this company keeps on the same track, it will never turn a profit. Business model changes will have to happen… and why is a company filing for an IPO if it doesn’t have its business model figured out?
Now for contrast, let’s take a look at Amazon.
Each $1 of revenue cost $1.59 dollars in 1995. In 1996? $1.38. And in the final quarter on 1996? $1.28. Clearly, if Amazon kept going in a straight line, it would turn a profit. And, eventually, it did.
Campbell Soup just filed its annual report for its fiscal year ending July 31. If you want a glimpse into all the business issues currently vexing large businesses, pull up a computer screen and take a gander.
First are the financials, which were less than spectacular. Yes, revenue did rise 10 percent to $8.69 billion, but cost of goods sold rose 18.2 percent, marketing costs rose 5.5 percent, and administrative costs rose 18.9 percent. Throw in some restructuring charges and other expenses, and Campbell ended up with total costs rising almost $2 billion last year. Earnings before tax and interest landed at $469 million, two-thirds lower than 2017 numbers. Ugh.
Snoops that we are around here, we were especially interested in that spike in the costs of goods sold. Soup comes in cans, which are made of steel and aluminum. The Trump Administration is currently taxing steel and aluminum as part of its trade war. So we wondered — are those import taxes part of Campbell’s woes?
We visited our Interactive Disclosure viewer to see what Campbell had to say. We discovered a litany of disclosures in the Management Discussion & Analysis that hits pretty much every headache a large business might suffer today.
First Campbell talked about customer concentration generally, and how that consolidation is putting the squeeze on manufacturers of things like soups:
In 2018, U.S. soup sales declined primarily due to a key customer’s different promotional approach for soup. We expect consolidations among retailers will continue to create large and sophisticated customers that may further this trend… In addition, although e-commerce represents only a small percentage of total food sales, we anticipate it will continue to grow rapidly.
Bummer, but what about all those local retailers still fighting the good fight?
At the same time, new and existing retailers continue to grow and promote store brands that compete with branded products.
Sorry to hear that. But we came here to ask about steel and aluminum tariffs, Campbell. What can you tell us about that?
The cost of distribution has increased due to a significant rise in transportation and logistics costs, driven by excess demand, reduced availability and higher fuel costs. In addition, certain ingredients and packaging required for the manufacture of our products, including steel, have been or may be impacted by new or recently proposed tariffs. We expect these cost pressures to continue in 2019.
That’s tough, because those tariffs and higher energy prices aren’t likely to go away any time soon. What about trying to streamline operations? Would that help?
In connection with our transition to our new U.S. warehouse optimization model, we are also experiencing significantly higher than expected cost increases and shipment delays associated with the startup of our Findlay, Ohio distribution facility. The Findlay facility, operated by a third-party logistics service provider, serves as the Midwest hub for distribution of Campbell’s soups, Swanson broth, V8 beverages and Pace, Prego and Plum products.
Geez. Next you’re probably going to tell us Hurricane Florence dropped the whammy on you, too.
In September, our Maxton, North Carolina manufacturing and distribution capabilities were negatively impacted by flooding associated with Hurricane Florence. We expect the collective impact of these cost increases, shipment delays and weather-related issues to have a negative impact on our results of operations for the first quarter ending October 28, 2018.
Oh for pete’s sake, Campbell. We give up. Best of luck to you and we look forward to reading your earnings release in early November.
Every year around this time Calcbench examines the effect of exchange rates on corporate cash.
Why? Because the value of the dollar has important effects on cash. For example, a weaker U.S. dollar means purchasing foreign supplies becomes more expensive, potentially driving up your cost of goods sold. At the same time, selling overseas goods also becomes less expensive, because overseas customers have more purchasing power. During periods of a stronger dollar, that situation is reversed.
Companies must track the effect of exchange rates on cash in a line-item on the Statement of Cash Flows, unglamorously called “Effect of Exchange Rate on Cash.”
So Calcbench examined the amount of cash and equivalents that the S&P 500 reported at the end of 2017, and looked to see how much the exchange rate pushed that sum upward or downward.
First, how did the U.S. dollar do in 2017, anyway?
According to the Federal Reserve of St. Louis, not too good. The dollar began 2017 worth roughly 94.6 cents against a basket of major currencies, reached a low point of 86 cents in September 2017, and closed out the year at 87.4 cents. Take a look.
That said, the dollar is still up markedly from earlier in the decade. It bounced around 75 to 80 cents in the early 2010s, before inexorably rising as the Fed began raising interest rates in the mid-2010s.
Long story short: as the Fed raised rates in the mid-2010s, the dollar got stronger, so the exchange rate started to chew into cash and equivalents. Here are the numbers for 2012 through 2017.
What happened in 2016? The dollar stopped rising. It started the year at 95 cents, drifted downward to 90 cents, and ended 2016 right around 95 cents again. Hence the exchange rate effect decelerated to nibble at cash rather than chew.
And as the dollar continued to slide against other currencies in 2017 — mostly due to other economies finally reviving, and their currencies strengthening relative to ours — the exchange rate effect actually turned positive. It boosted the value of cash among the S&P 500 by 1.5 percent.
We know what you’re thinking: cool story bro, but what about 2018?
So far, the St. Louis Fed says, the dollar has trended largely downward: from 96.4 cents in January to 89.5 cents as of this week. That may be because of the mushrooming U.S. debt (which puts a lotta dollars out there), or stronger economies elsewhere, or a mix of both.
Regardless, if past is prologue, that means cash levels will get a little extra oomph again early next spring thanks to exchange rates.
We haven’t talked about last year’s tax reform for a while, so let’s revisit one significant item for corporate reporting: unremitted foreign earnings.
They’re still unremitted. More than that, they are unreported.
You may have seen that phenomenon explored in a recent Wall Street Journal article. Reporters examined the filings of 108 companies that account for roughly $2.7 trillion in unremitted foreign earnings, and found that those companies have brought home only about $143 billion so far — and more than $90 billion of that came from only two companies, Cisco Systems and Gilead Sciences. Everyone else in Corporate America is still keeping all those foreign earnings in foreign banks.
That wasn’t supposed to happen. Tax reform imposed a one-time “deemed repatriated earnings” tax on foreign profits, and eliminated most taxes on all future foreign earnings. Republicans said that would entice U.S. companies to bring all those foreign earnings home (roughly $4 trillion) and invest the dollars here.
Apparently Corporate America has decided differently. So what are companies doing with their cash? And how can Calcbench help you figure that out?
You can track companies’ unremitted foreign earnings either individually on our Company-in-Detail page; or compare them in bulk on our Multi-Company page. Just select the group of companies you want to study, and enter “Unremitted Foreign Earnings” in the Standardized Metrics search field. Presto, up come the results.
For starters, Calcbench examined all the unremitted foreign earnings among the S&P 500, from 2014 through 2017. “UFE” was briskly rising in the first three years of that period, from an average $6.7 billion in 2014 to $7.9 billion in 2016.
Then UFE fell, to an average of $5.22 billion. Among all the S&P 500 together, total unremitted earnings plunged more than 50 percent, from $2.49 trillion to $1.12 trillion.
That’s good, right? Must mean that tax reform is working and companies are bringing home that overseas cash, yes?
Not so fast.
When we examined each company’s financial data individually, we found lots of companies that simply stopped reporting UFE. The fields they had populated with data in previous years were blank. See Figure 1, below.
Why might a company do that? You can research a company’s rationale for changing its disclosure by using our Interactive Disclosure viewer, to see what the company had to say about whatever issue is on your mind.
So we did that for UFE — and then found nothing. Companies just dropped all reference to UFE in their disclosures. Period.
Take Microsoft as an example, in Figure 2, below. The column on the far right is the 10-K tax footnote from fiscal year 2017; the column on the far left is same footnote in the fiscal 2018 10-K. That middle column, and specifically the paragraph circled in red, is the language Microsoft dropped from its 2017 disclosure compared to 2018.
Microsoft is only one example. We found scores of them throughout the S&P 500, including names such as General Electric, Nucor, Walmart, Abbott Labs, Coty, Cigna, and others. All of them disclosed unremitted foreign earnings in 2016 annual reports, but not in 2017.
We don’t yet know why. We’re not sure we will ever know why. We do know, however, that you can use Calcbench to determine whether the companies you follow fall into that category — and then you can ask that question yourself on the next earnings call or at the next investor day.
And now for some shameless self-promotion: the CFA Institute has published a new article examining how structured data can help with financial analysis, featuring none other than Calcbench as an example of how to put structured data to work productively.
The paper, Data and Technology: How Information is Consumed in the New Age, reviews the uses of structured data: that is, pieces of data “tagged” with descriptors so computer software know what that data is and what the software can do with it.
For example, when you use our Multi-Company Page to pull up the revenue numbers for the S&P 500, our software is actually searching for all data with a
In the paper, Mohini Singh, director of financial reporting policy at CFA Institute, uses Calcbench to show how someone might compare a company’s accounting policies over time, to see whether and how those policies might change. Later Singh cites us again and our research into operating leases. (Oooh, double-shameless plug of our research on operating leases, too!)
Singh then goes on to discuss how some preparers of financial statements don’t like the chore of filing statements with XBRL (the structured data language used in financial statements), but consumers of those statements — investors and analysts — wolf down structured data like Pringles.
The paper is freely available, so give it a read and let us know what you think. We’re at firstname.lastname@example.org.
Stop everything! We interrupt our regular posts on leasing costs, tax reform, revenue recognition, and the like to bring you the really important stuff — like, which films are hitting the biggest of the big screens in 2019!
There we were, skimming the latest quarterly report from IMAX, when we saw it in the Management Discussion & Analysis, right there on Page 54: a complete list of all films IMAX currently plans to release in 2019, with planned release dates.
After all, IMAX makes its money from distributing films, so why wouldn’t its looming lineup be something worth discussion in the MD&A? IMAX has firm plans to release 45 films in 2018, and is working to release as many as 60 when all is said and done. (That would be comparable to the 60 films it distributed in 2017.)
So far the company has announced 17 films for 2019. Among the notables:
So on a more serious note, it’s interesting to see the deep ties IMAX has to Disney. Eight of the 17 titles IMAX has confirmed so far for 2019 are Disney titles. More important is that another three titles are from 20th Century Fox — so when Disney does take full control of those assets from the Fox-Disney merger (which investors approved earlier this summer), that will be 11 of 18 films. Disney will be an enormously important partner for IMAX.
Food for thought, along with the popcorn you grab on your way to see Venom or First Man. IMAX is releasing both of those next month.
Great news for Calcbench enthusiasts young and old! We have released our first-ever webinar, where one of the leading thinkers on financial analysis talks about the big challenges he sees for the profession today and how data analytics can help answer them.
The webinar, 48 minutes long, features a discussion with Marc Siegel, a 10-year veteran of the Financial Accounting Standards Board (and a 25-year veteran of financial analysis) who left FASB earlier this summer. Siegel graciously agreed to talk with us about astute ways to wrangle good insight out of financial statements, new accounting standards affecting financial analysis, and more.
Siegel takes up the first half of the webinar. Then we talk with our own CEO here, Pranav Ghai, who gives some specific examples of how you can use Calcbench to analyze the issues Siegel raises. Which is also good stuff to watch, and we’re not saying that just because Ghai is the one who signs the paychecks around here.
Some of the specific topics the webinar covers:
We’re eager to hear what you think of the webinar, or your ideas for future webinars (subjects we should explore, experts we should interview). Always feel free to drop us a line at email@example.com.
Ever wonder how an academic uses Calcbench? We recently talked with Ahmet Kurt, Ph.D., assistant professor of accounting at Suffolk University, about his extensive use of Calcbench for research and how he is incorporating Calcbench into his classroom this fall.
Q: Tell us a bit about your research and teaching style.
I do archival research on financial reporting quality, corporate governance, and auditing. I value practical research. My work has been cited in the Wall Street Journal, Bloomberg, and CFO.com.
In the classroom, I use my accounting and finance training to explain to students how these two important business functions interact. My teaching style is hands-on, with extensive use of real company data.
Q: What kind of data are you or your students looking for?
For my research on financial reporting quality, I am mostly interested in data pertaining to companies’ corporate financing transactions, such as share repurchases and equity financing.
My students use a variety of information included in the companies’ annual reports, such as financial statement data, management forecasts and discussion, and information on retail outlets and lease agreements.
Q: As a professor, how do you use Calcbench?
The day I started using Calcbench changed the way I collect data. Using Calcbench has cut my hand collection by more than 50 percent; in some cases, there is no hand collection required at all.
During my Ph.D. years, I spent a good amount of my time hand collecting data from companies’ SEC filings. This is a very time-consuming process. With Calcbench, I eliminated the need for manual data collection from the SEC’s website. However, if I still need to access companies’ SEC filings, Calcbench makes that process much easier by providing direct access to relevant filings with the “trace” link. I can also quickly download links to all 10-K filings, proxy statements, and earnings releases on the SEC’s website into a spreadsheet.
For my classroom, this will be the first semester that I am using Calcbench as an instructional tool. In the past, I built an Excel spreadsheet to download financial statement data from Yahoo Finance and other sources. Now the students in my Financial Statement Analysis course will be able to download, analyze, and compare companies’ financials using Calcbench.
Q: Calcbench uses XBRL to power its platform. You’re an author of, An Input Based Measure of Financial Statement Comparability. How is XBRL changing the way you research financial data?
XBRL is a promising technology for accounting and finance research. With the introduction of XBRL, researchers have gained immediate access to detailed financial data as reported by companies. The use of standardized tags, in many cases, facilitates the comparability of financial information across companies. Nevertheless, it is challenging for researchers to use “as is” XBRL data in their analysis because companies’ XBRL reporting practices are not uniform. (For example, there are some differences in how companies label particular XBRL items.) Standardized metrics provided by Calcbench help address this issue.
Q: Share repurchases are a hot topic these days. You recently published an article in CFO Magazine on accelerated stock repurchases (ASRs). Tell us about ASRs and why they are important.
ASRs let firms buy back a large block of their shares quickly from an investment bank. This is different from traditional buybacks where firms gradually repurchase shares in small amounts on the open market.
Shares repurchased in an ASR transaction are immediately recorded in treasury stock, reducing the company’s share count overnight. Some people even refer to ASRs as “overnight share buybacks.” This raises the question of whether firms use ASRs opportunistically to give a quick boost to earnings per share (EPS).
I find some support for this argument. One out of every four ASR firms would have missed analysts’ EPS forecasts had they not initiated the ASR transaction. I also find that the likelihood of using ASRs as an earnings management device is higher among firms that provided their CEOs with EPS-contingent bonus plans and firms that are habitual beaters of analysts’ EPS targets.
For the ASR article in CFO Magazine, I was able to get the most recent information on share repurchases from Calcbench in 30 seconds.
Among your areas of expertise are financial reporting quality, corporate governance, and auditing. How do you see Calcbench helping with financial reporting quality, corporate governance and auditing?
Calcbench provides immediate access to a large amount of data, contributing to information discovery and processing by market participants as well as academics.
High-quality research by analysts, investors, and other users improves transparency in capital markets, which is key to better reporting, auditing, and governance.
As we now know, the new accounting standard for operating leases take effect at the end of this year, and its primary consequences are all about the balance sheet.
Money you owe in operating leases will soon appear there on the liability side, and will be offset by a corresponding “right of use” asset on the asset side. The balance sheet grows, but stockholder equity stays the same. That will change a few financial ratios here and there, but the balance sheet consequences overall are generally easy to understand.
So, um, what about the income statement?
The tricky thing is that any asset listed on your balance sheet (goodwill, financial instruments, inventory, and so forth) is subject to impairment. Operating lease assets will be no different.
We don’t know how often operating lease impairments will happen, but they will happen sometimes. And when they do — boom, negative earnings surprise!
We already see this occasionally among the few companies that already have operating leases on their balance sheet. Take a look at this filer, who shall remain nameless today.
Could these impairments even be used for earnings manipulation? Well, maybe.
Consider this scenario: A company is already having a bad quarter, and then includes a big ol’ lease impairment to boot. Sure, the loss looks bad in the moment, but lease assets amortize over a set schedule. If you impair the asset today, the future amortization per quarter will suddenly be lower, thus making future quarters look better.
Of course, there’s also the possibility of a lease-related gain as well. If you renegotiate a lease down, or first take an impairment and subsequently wiggle out of the contract anyway, you would recognize a “gain on modification of lease.”
So net income and EPS numbers might look better, but only because you’re fiddling with your lease costs rather than any improved performance from operations.
Then again, dickering with the value of assets to make the bottom line look good is a time-honored tradition in financial reporting. Maybe the operating lease standard isn’t such a new thing under the sun after all.
Earlier this summer Calcbench looked at first-quarter 2018 numbers to see whether the costs of running a business, as seen in the cost of revenue and the sales, general & administrative line items, were rising faster than revenue.
Our picture back then was so-so: SG&A costs grew slightly slower than revenue (good news), but cost of revenue did grow faster than revenue (bad news). We speculated that if labor costs continue to rise or tariffs raised the price of imported materials, that squeeze could get even tighter.
Well now we have some early numbers for second-quarter 2018 — and so far, among a significant portion of the S&P 500, that squeeze has not emerged.
Calcbench pulled the second-quarter numbers for 366 filers in the S&P 500 and examined year-over-year change in revenue, cost of revenue, and SG&A expense. Here’s what the picture looks like in aggregate.
Broadly speaking, revenues are rising faster than costs, which translates into higher operating income. That’s good news as far as it goes.
On the other hand, plenty of specific companies within our sample population aren’t in that ideal shape. For example, 167 of the 366 companies we studied had cost of revenue rising faster than overall revenue. Likewise, 152 had SG&A costs rising faster than revenue — and 62 firms had both cost of revenue and SG&A costs rising faster than revenue.
We hesitate to draw too many conclusions about the economy as a whole from this single snapshot. First, revenue and expense patterns differ from one calendar quarter to the next; so even if you compare year-over-year results for consistency, that’s not the same as studying data across multiple quarters (like, six to eight of them) to identify trends that emerge over time.
Second, the performance of the S&P 500 may not be reflective of corporate filers as a whole, because these big boys have more ability to raise prices than smaller companies — and raising prices is an excellent way to keep revenue going up faster than your costs. Not all filers have that ability.
After all, when we examined the costs of revenue in June and found them rising faster than overall revenue, we looked at a population of more than 1,800 companies. The solid majority of them were not in the S&P 500. (Calcbench will do that again later this fall, once those second quarter numbers arrive from everyone else.)
And we’d be remiss if we didn’t note that this analysis is a retrospective look at events that have already happened. That’s quite different than the daily fluctuations on Wall Street, where traders are trying to make a prospective analysis of what’s likely to happen next. These days, they seem rather unnerved about trade wars and economic instability in Turkey, which might turn into an economic rout among emerging markets generally.
Calcbench subscribers, of course, can do all this analysis yourselves with our Multi-Company database page or our Data Query Tool. A deep dive into retrospective financial data, coupled with sharp thinking about what’s happening now that might appear in Q3 numbers later this fall — that’s getting you somewhere.
With the news about the drop in the Turkish lira lately, we were interested in which companies may be affected by a potential economic downturn in Turkey. We looked at companies’ disclosed geographical segments for specific disclosures about Turkey. The Table
below shows revenue reported in 2017 to come from Turkey and the percentage it represents out of total revenue.
Looking at the table, we can see some companies that stand out, like ArcelorMittal (MT), a steel and mining company which reported almost $2 billion of Turkish revenue. Although less than 3 percent of total revenue, it is a significant amount. A 30 percent decrease in that revenue stream could translate to about 20 percent of the company’s net income.
The vast majority of Eldorado Gold Corp.’s (EGO) revenue and all of Transatlantic Petroleum’s (TAT) revenue is reported to originate in Turkey. If you are interested in knowing more about Transatlantic Petroleum’s (TAT) business structure, you can check out its business description on Calcbench’s disclosures page.
Another interesting question is the assets held in Turkey. Eldorado Gold (EGO) reported $835,422,000 worth of assets in Turkey, more than 16 percent of total assets. Westwater Resources (WWR) reported $17,979,000 of assets in Turkey, which represents more than one-third of its total assets.
All this information was obtained from Calcbench’s breakout query.
Calcbench Professional users, who really want to geek out with the data, can go to Calcbench’s Raw XBRL Query and search for XBRL dimension members that include “Turkey”, yielding companies that report information relating to business in Turkey. This would include companies like Banco Bilbao Vizcaya Argentaria S.A. (BBVA), Chemical & Mining Co. of Chile Inc. (SQM), Hormel Foods (HRL), Unilever (UN), Vodafone Group (VOD) and many others.
As we noted in a post last week, a new accounting standard for operating leases comes into effect at the end of this year, where leasing costs must be reported on the balance sheet as liabilities.
Today we want to explore the opposite end of that exercise: what about all the leased goods that companies will add to the balance sheet as assets?
After all, the goal of new standard (ASC 842) is to help investors understand both the costs and benefits of all those operating leases. So while we all tend to talk about leasing costs on the liabilities side, we can’t forget that a corresponding adjustment will also take place on the asset side, too.
For example, a company’s return on assets is likely to change because the company will be adding assets. ROA is a performance metric analysts use to assess how well a company can turn a dollar of investment into profit. You calculate ROA by dividing net income into total assets, and express the result as a percentage. The higher the percentage, the better a company’s ROA.
But if you add leased assets to the balance sheet, the denominator of that equation gets bigger, which means the ROA percentage will get smaller — because of a change in accounting rather than a change in underlying business operations. Consider this hypothetical example below, where we increase assets by 40 percent (a very reasonable estimate of what companies might report). Hmmm.
First, we visited our Multi-Company Page and pulled up what the S&P 500 reported in 2017 for net income and total assets. That would let us calculate “normal” ROA. We also pulled up each filer’s future lease payments (which you can do with the normalized metrics Calcbench tracks), and added that number to total assets, under the theory that the costs on the liabilities side must equal the value on the asset side.
We’re not sure that technique is entirely street legal in the world of financial analysis, but it’s a good approximation to assess our general point: that filers’ ROA could change in spring of 2019 when the new standard starts showing up in corporate 10-Ks, and possibly to a material extent.
Collectively, the S&P 500 had $1.05 trillion in net income last year and $34.4 trillion in assets. That’s a return on assets of 3.04 percent. The S&P 500 also had $631.32 billion in future lease payments as liabilities. If you add that amount to total assets, then adjusted ROA falls to 2.99 percent.
Is that a lot? We’re not sure, although any time a metric crosses some significant threshold — like crossing from one whole number to the next — we could imagine automated trading programs going nuts, without necessarily understanding what’s really happening.
We also measured the spread for each company between its true ROA and the adjusted ROA it would have reported if the leasing standard had been in effect, and ranked them from largest spread to smallest. Here are our top 10.
No surprise that all 10 are consumer brands with stores or outlets across the country. (With the sole exception of Alaska Air, which leases aircraft and gate space.)
We noticed one other mathematical quirk. If a company reports a net loss, by definition its ROA will be negative, because division or multiplication including a negative number always results in a negative answer.
OK, but that also means adding to the asset portion of the formula increases ROA. Take a look.
Financial analysts may question the wisdom of that result. If a company is already losing money, and now we’ve added even more assets that it needs to invest into income, is the situation improving or not?
It’s an interesting question, and one you may want to pose to a CFO on that next earnings call once the new leasing standard goes into effect.
Our latest Calcbench research on leasing expenses is now available — and as a crucial new accounting standard for leasing costs approaches, you may want to give the report a read to see how our findings square with your company’s particular situation.
We analyzed the leasing costs reported by more than 3,000 companies. In total, that group is carrying leasing costs with net present value of $860 billion, which are off the balance sheet. (Undiscounted leasing costs are $1.04 trillion.) The new standard for lease accounting, going into effect on Dec. 15, will force companies to report all those numbers on the balance for the first time.
At some companies, those lease liabilities are multiple times larger than all other liabilities listed on the balance sheet. So as the new standard goes into effect, it could cause radical changes to what liabilities a company reports. We identified 24 firms whose leasing costs will increase total liabilities by more than 200 percent; two firms — Five Star Senior Living and Potbelly Corp. — will see increases above 400 percent.
As you can see below, the bulk of those $819 billion in leasing liabilities are concentrated among the S&P 500; that’s not surprising. The $320 billion in liabilities for the other 3,000 firms we examined might not be a big issue, but the average liability is $105 million per firm. For some small firms, that’s a lot of money.
Our report, which you can download on the always crackling Calcbench Research page, includes a list of the 25 firms with the greatest implied liability increase in relative terms; the 10 largest in dollar terms; a breakdown of leasing costs by economic sector; and a quick example of how to find these disclosures yourself using the Calcbench Interactive Disclosure tool.
Remember, folks, that new standard goes into effect in four months. You can find all the data you want or need here at Calcbench.
There we were, sitting around the Calcbench research offices, still marveling at Chicken Soup for the Soul Entertainment’s bargain purchase of a streaming media company — the subject of our last post, where we explored how Chicken Soup turned a $5.3 million purchase into a $24.3 million one-time boost to the income statement.
How many other bargains are out there, we wondered? What could we find? So we decided to flex our Calcbench database superpowers and take a look.
The mechanics of this exercise are not hard. First we returned to Chicken Soup’s disclosure about its one-time “gain on bargain purchase.” We clicked on the number itself ($24,321,747) to use our Trace feature — which showed us the XBRL tag that Chicken Soup used to identify that value as a “BusinessCombinationBargainPurchase.” See Figure 1, below.
Click on the result in the Tag column (circled in red in Figure 1) and that will take you to a new page that shows you everything you want to know about that tag. Including a heading called “Benchmark This Element.” See Figure 2, below.
That heading tells us that 3,516 filers used this tag in 2017 — so while not every filer might have a bargain purchase gain as large as Chicken Soup’s, lots of companies do report some type of gain on purchase.
Which ones? If you click on that “benchmark this element” link, Calcbench whisks you away to yet another page — where we list all the filers that use that element! Our default setting is to show you results within the S&P 500, for the most recent calendar year. You can change those setting to different peer groups or to other filing periods, using the controls along the top of the page. See Figure 3, below.
Notice that the first column of data is that XBRL tag. Most companies in the S&P 500 didn’t use it last year, so you won’t see many results. We scrolled through, however, and did notice a $233 million gain on bargain purchase reported by Exelon. Hmmm…
Again, click on that number and you can use our Trace feature to go back to the source document that produced it. We did, and found that in 2017 Exelon — a power generation company — spent $289 million ($235 million in cash and another $54 million worth of nuclear fuel) to acquire a nuclear power facility in upstate New York from Entergy.
The fair value of that facility included $1.28 billion in assets and $757 million in liabilities, which is a net gain of $522 million. In other words, Exelon paid $289 million in cash and nuclear fuel to put $522 million worth of assets on the balance sheet — which is a difference of $233 million. That’s the bargain gain.
And that’s how you can find them if you want to traipse through the data in Calcbench.
Odds are you’ve felt down in the dumps from time to time, and perhaps you turned to one of those Chicken Soup for the Soul books — you know, those feel-good collections of inspirational true stories about mothers, fathers, teenagers, veterans, and lots of other demographics.
Well, we happened to read Chicken Soup for the Soul Entertainment Inc.’s financial statements this week, and boy, those folks are probably feeling pretty good this year too.
First we noticed Chicken Soup’s stunning increase in net income, from $781,000 in 2016 to $22.8 million last year. Revenue, however, only rose from $8.12 million to $11 million — a jump of 35 percent, which is good, but nowhere near to explaining the gigantic spike in profit.
So we started looking through the income statement, captured below. The reason is about three-quarters of the page down. Do you see it?
A one-time “gain on bargain purchase” of $24.3 million. A bargain purchase, indeed.
We had to know more, So we flew over to the Interactive Disclosure page and looked up what Chicken Soup had to say under the Business Combinations item. We found that in November 2017, Chicken Soup acquired a company called Screen Media for $5.3 million.
Screen Media is the operator of PopcornFlix.com, a video-on-demand website that fits within Chicken Soup’s broader media empire. Currently offering Breakfast at Tiffany’s, Braveheart, and Death Bed: The Bed That Eats, among other titles. To each their own.
Apparently Screen Media was in debt up to its film reels. The company is privately held, so we don’t know how much debt — but enough debt that its lenders simply wanted the owners to sell the business, which was limping along with falling revenue and operating losses anyway.
Meanwhile, that business of selling video-on-demand does have value, in the form of future revenue streams. So Chicken Soup had a third-party appraiser evaluate the whole operation, and disclosed this:
Under the income-based approach, the third-party appraiser calculated the net present value (“NPV”) of after-tax cash flows as expected from the film library and from Popcornflix. The NPV was added to a terminal or exit value for these assets to obtain estimates of fair value. Based on the fair value of the net assets acquired, the acquisition of Screen Media resulted in a gain on bargain purchase of $24.3 million.
Screen Media, in recent years, had been heavily indebted and their lenders allowed it to seek an acquirer who would pay an agreed-upon amount to such lenders, who were willing to accept a significant reduction in the total indebtedness due. This allowed the Company to acquire Screen Media on a debt-free basis at a significant discount.
So Chicken Soup essentially acquired the business debt free, and turned a $5.3 million purchase into a one-time gain on the income statement of $24.3 million.
Call it Chicken Soup for the Financial Analyst’s Soul — and you can unravel mysteries just like it, easily and clearly, through Calcbench.
Another bundle of data and insight from the crack Calcbench research team is now available: our latest survey of share repurchase programs.
This report, which you can download on the Calcbench Research page, covers 25 quarters from 2012 through the first quarter of 2018 and analyzes more than 22,000 “firm quarter observations” — that is, every instance of a company repurchasing shares. For example, Apple repurchased shares in 19 of those 25 quarters, so it appears in the dataset 19 times.
We found 1,481 observations of firms spending more than $500 million in a quarter on repurchases, and 701 observations larger than $1 billion. We call those observations “mega-buybacks.” Mega-buybacks accounted for only 3.2 percent of all observations we recorded, but 48.7 percent of all dollars spent on repurchases.
As you may have seen in other news reports already, Corporate America went a bit nuts with share repurchase programs in first quarter 2018 thanks to last year’s tax reform— an all-time high in dollars spent on repurchases, and almost a record in number of companies engaging in repurchase programs. This chart below shows the spike.
Our report also breaks down the number of buybacks sorted by dollar value; lists the biggest repurchasers of stock over the last 25 quarters; calculates dollars spent by the top 10 repurchasers in a quarter, as a percentage of all companies that quarter; calculates repurchase yields; compares repurchase spending to dividends spending; and much more.
We update our repurchase report every quarter, so look for fresh numbers with Q2 2018 included sometime after Labor Day.
From time to time Calcbench likes to do a quick analysis of financial data, to see what aggregate numbers among many companies might tell us about corporate performance. Today’s metric: free cash flow.
We last looked at free cash flow 12 months ago. “FCF” is a non-GAAP metric, generally defined as a company’s operating cash flow minus capital expenditures. That is, it’s the money that remains after the company pays to maintain its assets and operations.
Why is FCF useful? Because it indicates how much cash a company has for non-essential endeavors: investing more in R&D, making acquisitions, buying back shares, and so forth. So we wanted to see what the latest picture looks like, among the S&P 500 and among all public filers generally.
First is free cash flow among the S&P 500. We examined the average quarterly FCF per filer, from first quarter 2013 through first quarter 2018. As you can see in Figure 1 below, FCF fluctuates considerably from one quarter to the next — but the trend line, noted in red, clearly tilts downward.
What might that mean? Well, we know that cost of revenue has been rising lately, as has Sales, General & Administrative expense. It’s also worth noting that FCF in first quarter 2018 is up sharply ($502 million) relative to first quarter FCF in the prior three years, when it hovered below $350 million. That coincides with the first full quarter after last year’s corporate tax cut, which put a lot of cash into company coffers. Hmmm.
We could speculate that if FCF suddenly turns upward for the rest of 2018 — something we won’t know for many months yet — that might be tax reform at work. Once those quarterly statements arrive financial analysts might want to look more closely at specific companies to understand: is free cash flow rising because of smart cost management, or because of tax reform?
We also have an FCF analysis for all public filers, in Figure 2 below. Here we can see the trend is decidedly upward, even if average FCF is much lower in absolute dollars (because we’re looking at smaller companies with smaller financial operations overall).
On the other hand, we also see that same phenomenon of first quarter 2018 FCF much higher than comparable first quarters in prior years. Tax reform? Something else? We don’t know. But as always — Calcbench does help you see the trends at large, so you can ask the right question for the specific companies that matter most to you.
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