The Westport story that people are talking about

Investment Analysis Clubs Saul’s Investing Discussions
21

Would love it if you could compare one of our new companies that’s not yet profitable to Westport, and show how [it’s different]. Basically simply explain how we see a good company that isn’t yet profitable and it’s road to profitability. Like shop, ayx, etc. Higher growth rate, higher gross margins, fcf, etc.

Great question, MusiCali

First Westport, at the time was losing 106% of revenue. They were making big pieces of machinery (hardware) with 27% gross margin (they kept 27% of what they sold to run the business with, which didn’t come anywhere close) They had no recurring revenue and little in the way of sure orders. They were hoping for 30% revenue growth.

Now Shopify, last year, looking at GAAP, they were losing 6% of revenue (not 106%!!!). They were selling software mostly, and on subscription, with 56% gross margins (they kept 56% of what they sold to run the business with, which came within 6% of covering it according to GAAP). Their subscription revenue was recurring, the revenue they get as a little cut of merchant sales couldn’t be counted as recurring, but in reality most of it is. Their revenue growth was 73% last year. That’s the conservative presentation. In reality (non-GAAP), they actually made a profit of 2% of revenue last year, up from a loss of about 1% of revenue the year before.

Now Alteryx, is an even better story in some ways. Last quarter results they had a GAAP loss of just 5% of revenue (not 106%!!!). They were selling software mostly, and on subscription, with 84% gross margins (they kept 84% of what they sold to run the business with, which came within 5% of covering it according to GAAP). Their subscription revenue was all recurring and they had a net retention rate of 131% (which means last years customers spent 31% more this year than last year, so revenue was up 31% before they even got a single new customer). Their revenue growth was up 55%. Their operating cash flow was 14% of revenue!!! That’s the conservative presentation. In reality (non-GAAP), they actually made a profit of 3.6% of revenue last quarter, up from a loss of about 20% of revenue the year before. Wow, maybe I should go out and buy some more! Oh wait! It’s my biggest position already!

Best,

Saul

37 Likes
22

Basically simply explain how we see a good company that isn’t yet profitable and it’s road to profitability

MusiCali, Financial Statements were created to allow owners to manage their business. Investors should know how to read and interpret them. All we need is the Big Picture and that is quite simple. Keeping things simple, we only need to look at two of them,

The Statement of Profit and Loss which shows how the business digests revenue. Very simply


**Concept                               Dollars      Margin** 
Revenue                             1,000,000        100%
Less Cost of Revenue                  700,000         70%
   Gross Profit (or loss)             300,000         30% - Gross

Less Operating Expenses               200,000         20%
   Operating Profit (or loss)         100,000         10% - Operating

Plus or (Minus) Other Stuff           (20,000)
   Net Profit (or loss)                80,000          8% - Net

Number of Shares Outstanding        2,000,000
Earnings per Share                      $0.25

One statement in isolation does not tell you much but if you look at a series of them it’s like looking at a movie, you see where they came from and where they are going. For me the most relevant questions are how much of the revenue gets converted into profit and whether cost and expenses are growing faster or slower than revenue. If you get this far, you already have a passing grade. This information is available in the SEC filings 10-Q (quarterly) and 10-K (annual).

Saul’s analysis of Westport was entirely based on the Statement of Profit and Loss, their costs and expenses were so high that they could never get to profitability. Go back and read his reasoning, it’s a look at a P&L statement and then a look at a series of them with a projection into the future.

The Balance Sheet is a snapshot of the business consisting of three parts


**Assets**
   Current assets          2,000,000 - Cash or convertible into cash in one year or less
   Fixed assets            8,000,000
Total Assets              10,000,000 - what the business owns

Less **Liabilities**
   Current liabilities     3,000,000 - payable within one year
   Long Term Liabilities   5,000,000
Total Liabilities          8,000,000 - what the business owes

**Capital**                    2,000,000 - the net worth of the business

What to look for is if the assets are real or imaginary (Goodwill) and whether the liabilities are reasonable for the business or is it likely to go bust. Also look for a balance between current assets and current liabilities to asses whether the business will have the funds to pay for expenses. That’s it! There are certain other ratios that are interesting but not too important for investors, we just want to be sure the business will be around another day to do business.

If you master the above you are probably in the top ten or twenty percent of investors ranked by understanding of accounting. If you dig much deeper you are probably wasting your time, we are not running the business!

Denny Schlesinger

53 Likes
23

Did nobody notice?


   Net Profit (or loss)                80,000          8% - Net

Number of Shares Outstanding        2,000,000
Earnings per Share                      $0.25  <-- ???  80,000/2,000,000 = .04!

Denny Schlesinger

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24

Wow That’s really Awesone Denny
Thank you so much for the lesson.
I will print this out and refer back to it :slight_smile:

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25

MusiCali, I hope it’s useful for you. I often thank my boss at NCR, Mr. Tulio Hansen, for making me learn accounting. I studied by correspondence with a university extension course. Today you can probably find online courses. But keep it simple!

I used to think that accounting was really boring because I was confusing it with double entry bookkeeping. Accounting is actually very creative and it gives you fantastic insights into how businesses work. That’s what it was designed to do.

Denny Schlesinger

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26

Thanks Denny for your post, and MusiCali for asking the question. This has helped with my understaning what is important when assessing a company’s financials.
Grateful for all contributors to these boards!
DM

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27

we are not running the business!

How true . . . Most people think that keeping two sets of books can only mean that the company is doing something shady. In some cases that is most likely true. But the simple fact of the matter is that most large companies and many mid-size companies keep multiple sets of books. The GAAP books and proforma statements are the ones presented to financial institutions and investors not just due to legal requirements (for publicly traded companies) but because they set out the companies financial performance and position in a consistent manner which makes the company understandable to the financial community.

There are generally multiple sets of “books” or internal financial reports which are used by management, industrial engineers, business analysts and a host of others that help improve the operations of the company. They are used to look for production bottlenecks, inefficiencies, waste, etc. These “books” are not revealed to the public. They serve as the basis for resource allocation and internal investments.

Financial analysts would probably make all kinds of erudite “reports” to the investment community if they had access to these books - fortunately for us all, they generally do not get to see them. If you think folks like Andrew Left who fabricate a short thesis on sketchy information are somewhat dishonest with the way the handle information at present, you have know idea of what they might make of the internal documents by cherry picking specific items out of these documents.

28

There are generally multiple sets of “books” or internal financial reports which are used by management, industrial engineers, business analysts and a host of others that help improve the operations of the company.

I think your wording makes it clear that you understand this, BrittleRock, but there is a world of difference between two sets of books, i.e., two completely separate sets of financial records with different information, and having one set of financial statements which one presents to the SEC and another set of statements and reports that one uses for running the business. The later is just multiple reports for multiple purposes. Indeed, many companies will have both GAAP statements and non-GAAP statements, if they commonly report both figures and those are both public reports. Multiple reports is no more than recognizing that there are different ways of looking at the information.

29

Denny
No I did not “notice”
What should I notice here?
Also, the .25 earnings per share
Is that based of the net profit?
From 2m shares outstanding I did not know how to get the eps number
Thanks
MC

30

When I divide 2,000,000 by 80,000 I get the number 25
Not .25
What am I missing here? Thanks

31

MusiCali,

Denny was pointing out the error in his original post about accounting.
Excellent post by the way, Denny.

Originally, it said 80,000/2,000,000 = 0.25

That was incorrect. It equals 0.04.

Hope that helps clear it up.

A.J.

32

MusiCali, what Phoolio18 says!

http://discussion.fool.com/musicali-denny-was-pointing-out-the-e…

EPS = Earnings / shares outstanding

Diluted EPS, add the options to be exercised but only if there is a profit.

Denny Schlesinger

33

Thanks Saul, those were the posts that brought me to this board, therefore the most valuable posts I ever read. Many thanks.

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34

Yes
I think it was the Westport call that piqued my interest in Saul and consequently this board.
We found a gold mine :slight_smile:

1 Like
35

Thanks AJ and Denny
I get it now!
I was dividing the 2 numbers backwards