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Costs of Revenue, SG&A: Q2 Update
Wednesday, August 15, 2018

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.

Caveats to Contemplate

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.


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