Metric No. 1

advertisement
Gartner Data Center, Infrastructure & Operations Management Conference
7–10 December 2015 | Las Vegas, NV
Focus on These Six Key Financial
Metrics to Help Determine
Vendor Viability
Gary Spivak
This presentation, including any supporting materials, is owned by Gartner, Inc. and/or its affiliates and is for the sole use of the intended Gartner audience or other intended recipients. This presentation may
contain information that is confidential, proprietary or otherwise legally protected, and it may not be further copied, distributed or publicly displayed without the express written permission of Gartner, Inc. or its affiliates.
© 2015 Gartner, Inc. and/or its affiliates. All rights reserved.
Would You Trust This Vendor?
Should I trust
this guy?
Would You Trust
This Vendor?
1
© 2015 Gartner, Inc. and/or its affiliates. All rights reserved.
But What If They
Looked Like This?
Polling Question
What is your current level of financial expertise?
 Little to none.
 Not bad — self-taught.
 I took a couple of accounting/finance courses.
 I have an accounting or finance degree.
 I am an expert at financial statement analysis.
2
© 2015 Gartner, Inc. and/or its affiliates. All rights reserved.
Financial Analysis Skills Are Rare in IT
Through 2018, more than 75% of IT leaders will lack the financial statement
analysis skills to avoid overexposure to financially troubled vendors.
Supporting the SPA:
Alternative position to SPA:
 Briefings and inquiries show
 I&O will mature faster than
a lack of financial analysis skills
within IT.
 I&O leaders are still more focused
on operational metrics than on
business metrics.
3
© 2015 Gartner, Inc. and/or its affiliates. All rights reserved.
expected in providing and
communicating business value to
business leaders.
 A high-profile vendor failure will
cause IT leaders to urgently focus
on these skills.
Key Issues
1. Why should you care about the financial status of strategic vendors?
2. What are the most critical ratios and metrics to use in advanced
vendor financial statement analysis?
4
© 2015 Gartner, Inc. and/or its affiliates. All rights reserved.
Key Issues
1. Why should you care about the financial status of strategic vendors?
2. What are the most critical ratios and metrics to use in advanced
vendor financial statement analysis?
5
© 2015 Gartner, Inc. and/or its affiliates. All rights reserved.
You Need Credible, Viable Solutions!
30+ Years
6
© 2015 Gartner, Inc. and/or its affiliates. All rights reserved.
Supplied by MANY Vendors
7
© 2015 Gartner, Inc. and/or its affiliates. All rights reserved.
But Some Run Into Financial Difficulties
Either Get Help
8
© 2015 Gartner, Inc. and/or its affiliates. All rights reserved.
Or Not!
Polling Question
How often are your strategic vendors evaluated on their
ability to remain viable?
 Never.
 Once a year.
 Every two or three years.
 Before every contract renewal.
 Don't know.
9
© 2015 Gartner, Inc. and/or its affiliates. All rights reserved.
Key Issues
1. Why should you care about the financial status of strategic vendors?
2. What are the most critical ratios and metrics to use in advanced
vendor financial statement analysis?
10
© 2015 Gartner, Inc. and/or its affiliates. All rights reserved.
Public Financial Statements
 Income Statement:
– Revenue
– Spending/Investments
– Profitability
 Balance Sheet:
– Assets
– Liabilities
 Statement of Cash Flows:
– Sources of cash
– Uses of cash
11
© 2015 Gartner, Inc. and/or its affiliates. All rights reserved.
Gartner Vendor Financial Rating
 Measures:
– Growth
– Profitability
– Ability to meet current obligations/solvency
– Cash flow generation
12
Calculate:
LTM Revenue
Growth (%)
Gartner
Score
Calculate:
LTM Profit
Margin (%)
Gartner
Score
Calculate:
Current Ratio
(Decimal)
Gartner
Score
Calculate: LTM
CFO/ Revenue
Gartner
Score
Score
Rating
-1000.0%
0
-1000.0%
0
0.00
0
-150.0%
0
0
Strong Negative
-75.0%
1
-100.0%
1
0.60
1
-90.0%
1
9
Strong Negative
-34.0%
2
-50.0%
2
0.80
2
-42.0%
2
10
Caution
3
19
Promising
-14.0%
3
-25.0%
3
0.95
3
-18.0%
-4.0%
4
-9.0%
4
1.10
4
-6.0%
4
25
Positive
1.0%
5
0.0%
5
1.25
5
0.0%
5
32
Strong Positive
6.0%
6
2.0%
6
1.40
6
3.0%
6
16.0%
7
6.0%
7
1.55
7
9.0%
7
36.0%
8
12.0%
8
1.70
8
18.0%
8
76.0%
9
20.0%
9
1.85
9
30.0%
9
156.0%
10
30.0%
10
2.00
10
45.0%
10
2.20
9
2.60
8
3.20
7
4.00
6
© 2015 Gartner, Inc. and/or its affiliates. All rights reserved.
Six Key Financial Metrics
13
Revenue/
Turnover
Growth
Bookings
Growth
Profitability —
Net Profit
Margin
Current
Ratio
Cash From
Operations
Margin
R&D
Spending
Ratio
© 2015 Gartner, Inc. and/or its affiliates. All rights reserved.
Metric No. 1 — Revenue Growth
TTM Revenue/Last Year's TTM Revenue — 1.
 Metric No. 1 — Trailing Twelve Month (TTM)
Revenue (Turnover) Growth:
– Information Taken From Income Statement.
– Optional: Look at Major Product Growth, License, as Opposed
to Secondary Drivers, Like Maintenance or Services.
14
© 2015 Gartner, Inc. and/or its affiliates. All rights reserved.
Metric No. 1 — Data on Income Statement
Microsoft Corporation
Yearly Income Statements
(In millions, except earnings per share)
FY12
FY13
FY14
$ 73,723
$ 77,849
$ 86,833
Cost of revenue
17,530
20,249
26,934
Gross margin
56,193
57,600
59,899
9,811
10,411
11,381
13,857
15,276
15,811
General and administrative
4,569
5,149
4,821
Goodwill impairment
6,193
0
0
Integration and restructuring
0
0
127
Other expenses
0
0
0
21,763
26,764
27,759
504
288
61
0
0
0
22,267
27,052
27,820
5,289
5,189
5,746
16,978
21,863
22,074
0
0
0
16,978
21,863
22,074
Revenue
Research and development
Sales and marketing
Operating income
Other income (expense), net
Noncontinuing items
Income before income taxes
Provision for income taxes
Net income before accounting change
Cumulative effect of accounting change
Net income
15
© 2015 Gartner, Inc. and/or its affiliates. All rights reserved.
What Is Deferred/Unearned Revenue?
Why Should You Care?
 Common in business models with
ongoing deliverables —
like maintenance, subscriptions
 Deferred revenue is only recognized as
revenue ratably throughout the period
 Remainder "stored" on
the balance sheet
 Pure subscription
models will be slower
growth than revenue
recognized at sale
16
© 2015 Gartner, Inc. and/or its affiliates. All rights reserved.
Liabilities and stockholders' equity
Current liabilities:
Accounts payable
$
Short-term debt
7,432
$
4,828
2,000
0
0
2,999
4,797
4,117
782
592
23,150
20,639
558
645
6,906
3,597
45,625
37,417
20,645
12,601
Long-term unearned revenue
2,008
1,760
Deferred income taxes
2,728
1,709
11,594
10,000
Total liabilities
82,600
63,487
Total stockholders' equity
89,784
78,944
172,384
$ 142,431
Current portion of long-term debt
Accrued compensation
Income taxes
Short-term unearned revenue
Securities lending payable
Other
Total current liabilities
Long-term debt
Other long-term liabilities
Total liabilities and stockholders'
equity
$
Metric No. 2 — "Bookings" Growth
Bookings growth = (TTM bookings)/(the year ago TTM bookings) — 1
 Bookings is nonstandard — it is not defined the same way by
every company.
 Bookings = Revenue + change in deferred revenue.
17
© 2015 Gartner, Inc. and/or its affiliates. All rights reserved.
Why Is Profitability Important?
18
© 2015 Gartner, Inc. and/or its affiliates. All rights reserved.
Income Statement Example
Microsoft Corporation
Yearly Income Statements
(In millions, except earnings per share)
FY12
FY13
FY14
$ 73,723
$ 77,849
$ 86,833
Cost of revenue
17,530
20,249
26,934
Gross margin
56,193
57,600
59,899
9,811
10,411
11,381
13,857
15,276
15,811
General and administrative
4,569
5,149
4,821
Goodwill impairment
6,193
0
0
Integration and restructuring
0
0
127
Other expenses
0
0
0
21,763
26,764
27,759
504
288
61
0
0
0
22,267
27,052
27,820
5,289
5,189
5,746
16,978
21,863
22,074
0
0
0
16,978
21,863
22,074
Revenue
Research and development
Sales and marketing
Operating income
Other income (expense), net
Noncontinuing items
Income before income taxes
Provision for income taxes
Net income before accounting change
Cumulative effect of accounting change
Net income
19
© 2015 Gartner, Inc. and/or its affiliates. All rights reserved.
The Bottom Line
Measurements of Profitability
 Revenue Growth Is Important —
but Ultimately, MUST HAVE Profitability.
 Displays the Ability to Generate
Shareholder Value From the Business.
 Measures:
– Gross Margin.
– Operating Margin.
– Net Profit Margin = THE BOTTOM LINE!
20
© 2015 Gartner, Inc. and/or its affiliates. All rights reserved.
Metric No. 3 — Net Profit Margin
Net margin = TTM net income/TTM revenue:
 Net profit margin IS the bottom line:
– Information from the income statement.
– Strength depends on sector:
 Software — over 10% good.
 Hardware — medium to high single digits.
 Service — single digits.
– If
negative — find out why:
 Growing?
 Restructuring?
 Headed for oblivion?
21
© 2015 Gartner, Inc. and/or its affiliates. All rights reserved.
Why Meeting Obligations Is Critical
LIQUIDATION
BANKRUPT
22
© 2015 Gartner, Inc. and/or its affiliates. All rights reserved.
INSOLVENT
Balance Sheet
Microsoft Corporation Balance Sheets
(in Millions)
June 30
2014
June 30
2013
Assets
Current assets:
Cash and cash equivalents
Short-term investments
(including securities loaned of $541 and $579)
Total cash, cash equivalents and
Short-term investments
Accounts receivable, net of allowance
for doubtful accounts of $301 and $336
Inventories
Deferred income taxes
Other
Total current assets
Property and equipment, net
of accumulated
depreciation of $14,793 and $12,513
Equity and other investments
Goodwill
Intangible assets, net
Other long-term assets
Total assets
23
© 2015 Gartner, Inc. and/or its affiliates. All rights reserved.
$
$
8,669
$
3,804
77,040
73,218
85,709
77,022
19,544
2,660
1,941
4,392
114,246
17,486
1,938
1,632
3,388
101,466
13,011
14,597
20,127
6,981
3,422
172,384
9,991
10,844
14,655
3,083
2,392
142,431
$
Liabilities and stockholders' equity
Current liabilities:
Accounts payable
Short-term debt
Current portion of long-term debt
Accrued compensation
Income taxes
Short-term unearned revenue
Securities lending payable
Other
Total current liabilities
Long-term debt
Long-term unearned revenue
Deferred income taxes
Other long-term liabilities
$
Total liabilities
Total stockholders' equity
Total liabilities and
stockholders' equity
$
7,432
2,000
0
4,797
782
23,150
558
6,906
45,625
20,645
2,008
2,728
11,594
$
4,828
0
2,999
4,117
592
20,639
645
3,597
37,417
12,601
1,760
1,709
10,000
82,600
89,784
63,487
78,944
172,384
$ 142,431
Current obligations MUST be met.
If not, results could be default,
bankruptcy, liquidation!
Metric No. 4 — Current Ratio
Current ratio = Current assets/current liabilities.
 Measures ability to meet near-term obligations
with cash (or soon to be cash).
 Normally want to see ratio greater than 1.
 Ideally want to see at or greater than 2.
 Deferred revenue can skew the value —
watch for this.
24
© 2015 Gartner, Inc. and/or its affiliates. All rights reserved.
Why Is Cash Flow Important?
25
© 2015 Gartner, Inc. and/or its affiliates. All rights reserved.
Cash Flow Statement
 Measures the cash generated three different ways:
– Operations
Statement of Cash Flows
– Investments
– Financing
 Cash from operations — the most important;
Operating
Activities
measures how business activities generate cash
 Cash used for investments:
– Includes capex
 Cash flow from financing:
– Includes cash from issuing/buyback of stock, debt, dividends
26
© 2015 Gartner, Inc. and/or its affiliates. All rights reserved.
Investing
Activities
Financing
Activities
Metric No. 5 — Cash From Operations Margin
TTM cash from operations/TTM revenue.
 Measures ability of business to generate cash.
Cash inflow
 Be wary if consistently negative.
 Gain comfort when consistently over 20%.
 Similar sector dynamics as net profit margin.
Cash in hand
Cash outflow
27
© 2015 Gartner, Inc. and/or its affiliates. All rights reserved.
Metric No. 6 — R&D Spending
Microsoft Corporation
Yearly Income Statements
(In millions, except earnings per share)
TTM R&D expense/
TTM revenue.
FY12
Revenue
 Monitor spending on research and
development to gauge vendor
commitment to product enhancements.
Sector
Communications Equipment Average
Technology Hardware, Storage and Peripherals Average
Diversified Telecommunication Services Average
Internet Software and Services Average
IT Services Average
Semiconductors and Semiconductor Equipment Average
Software Average
Wireless Telecommunication Services Average
Electronic Equipment, Instruments and Components Average
Source: Gartner (November 2015)
28
© 2015 Gartner, Inc. and/or its affiliates. All rights reserved.
R&D as a
percentage
of Revenue
14.9%
12.7%
1.9%
16.8%
3.5%
12.0%
18.8%
0.4%
11.2%
$
73,723
FY13
$
77,849
FY14
$
86,833
Cost of revenue
17,530
20,249
26,934
Gross margin
56,193
57,600
59,899
9,811
10,411
11,381
13,857
15,276
15,811
General and administrative
4,569
5,149
4,821
Goodwill impairment
6,193
0
0
Integration and restructuring
0
0
127
Other expenses
0
0
0
21,763
26,764
27,759
504
288
61
0
0
0
22,267
27,052
27,820
5,289
5,189
5,746
16,978
21,863
22,074
0
0
0
16,978
21,863
22,074
Research and development
Sales and marketing
Operating income
Other income (expense), net
Noncontinuing items
Income before income taxes
Provision for income taxes
Net income before accounting change
Cumulative effect of accounting change
Net income
Action Plan for I&O Leaders
Monday Morning:
 Identify the key strategic vendors in your organization.
 Discover which contract renewals arise in the next three months.
 Collect financial information on those vendors.
Next 90 Days:
 Calculate the six key metrics on those relationships due to renew in the next
six months.
 Determine where the best source of financial information is for each vendor.
 Develop proficiency in this exercise.
Next 12 Months:
 Utilize awareness of financial status in negotiations.
 Illustrate the financial analysis when requesting authorization in product acquisition.
29
© 2015 Gartner, Inc. and/or its affiliates. All rights reserved.
Recommended Gartner Research





Analysis of Income Statements Exposes Secrets to Reduce Risks of
Vendor Obsolescence
Gary Spivak (G00261495)
Analyze Vendor Balance Sheets to Reduce Risk of Vendor Obsolescence
Gary Spivak (G00262389)
Analysis of Vendor Cash Flows Helps Predict and Mitigate
Risk of Vendor Obsolescence
Gary Spivak (G00263515)
How to Re-evaluate Strategic Vendors Acquired by Private Equity
Gary Spivak, Colin Fletcher and Robert Naegle (G00267514)
Understanding Gartner's Financial Ratings of IT Vendors
Joseph Baylock, Frank Marsala and Others (G00166659)
For more information, stop by Gartner Research Zone.
30
© 2015 Gartner, Inc. and/or its affiliates. All rights reserved.
31
© 2015 Gartner, Inc. and/or its affiliates. All rights reserved.
Download