Zulily: Revenue is on Post-IPO Watch!

Zulily, Inc. (ZU), an online flash sale retailer geared toward moms, especially younger mothers,  just had a very successful IPO in mid November.  According to Yahoo Finance, there were 10.15 million shares exchanged hands on Zulily’s first day as a public company. Combined the first two days, there were totally 11.5 million shares exchanged, very close to the planned volume, i.e. 11.5 million shares, on Zulily’s prospectus filed on November 15th, 2013. Since then, average traded volume for Zulily has been around 355k, which is only a third of what was traded on its first trading day.

On this note, we would like to take a look at Zulily’s most recent quarter financial performance before discussing further.

Zulily has been able to improve its bottom line for the quarter ended September 30th, 2013 with net income of $155k, based on GAAP financial measure, as shown below. However, in terms of its cost structure,  gross profit margin stayed almost the same. Therefore, the growth rate of net revenue would be one of the pointers for its stock price to go higher. Meanwhile, there are few bright spots including less-than-before percentage in both marketing expenses and SGA&E. Specifically, when we take a look at the growth rates among net sales, marketing and SGA&E, we can see that the growth of net sales have been nicely larger than those of marketing and SGA&E on the annual basis and nine-month ended September 30th, 2013, respectively. These trends yield a room of profitability in the midst of growing revenue. With this said, Zulily’s adjusted EBITDA had turned positive first time since its inception in 2010 and we can also see that most of EBITDA was squeezed by the rising depreciation, amortization and stock-based compensation.

On the balance sheet side, Zulily has grown its cash and short-term investment steadily to a level of 60% of total assets, as of September 30th, 2013. Additionally, Zulily has also raised an amount between $127 – $147 million in its IPO, depended on whether underwriters had fully exercised their overallotment option. So in terms of cash position, Zulily has strengthened its war chest with expectations to do more in mergers and acquisitions, which currently didn’t show up in balance sheet at all.

However, according to Zulily’s Form S-1, the pro forma as adjusted net tangible book value per share after its IPO offering was $1.69 – $1.84. Then with the current stock price hovers around $35, the price-to-book-value ratio (P/B ratio) would be around 18, which implies that its valuation might look full. For the nine months ended September 30th, 2013, Zulily has net sales at $438 million already and the net sales in the fourth quarter would be one of the deciding factors to dictate whether its current price would continue the momentum since its IPO.

Bottom Line: Zulily, Inc. started out as a flash sale site company geared toward moms and enjoyed many early successes. However, investors should pay attention to the sustainability, continuity and richness in its stock price.

Zulily's Form S-1 EBITDA to NET INCOME GAAP

Zulily Growth Rates on Net Revenue, Marketing, SGAE

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SCTY: Empowered by Financing Structures and Stock Rally

Solarcity (SCTY) has filed its Form 10-Q on 11/12/2013 for the quarter ended September 30, 2013. It was no surprise to see that the most recent quarter still inked in the red, with net loss of $34.5 million. Meanwhile, revenue has reached to $48.6 million, with a 52% increase as compared to same period a year ago. Since its debut in public market, SCTY has increased more than sixfold of its IPO price, i.e. $8 as reported in its Form S-1. On Nov. 19th, 2013, SCTY has closing price of $46.72 and it had been on momentum so far this year.

Let’s take a look at SCTY’s financial statements before discussing further.

SCTY has gross margin in the range between 35% and 40% of total revenue, for the three months and nine months ended September 30th, 2013. When combined with sales/marketing expenses and GA&E expenses, cost of operating has squeezed out the room of profitability completely, even without considering interest expenses. It is obvious from SCTY’s cost structure to see that immediate upcoming quarters will continue the trend of loss in operation. However, the story doesn’t end here. We see that SCTY has begun to shift one of its emphases to operating leases, away from sales of solar energy systems. For the most recent quarter ended September 30th, 2013, more than 50% of revenue was contributed by operating leases, as compared to 43.53% of total revenue same period a year ago. This is partly due to the financing attributable to implement assets monetization strategy, as recorded in SCTY’s Form 10-Q.  There are few structures that SCTY has in place now, as follows.

  • Joint Ventures: SCTY and its fund investors contribute funds into a joint venture, which would acquire solar energy systems from SCTY and subsequently lease these systems to SCTY’s customers. SCTY consolidates the joint ventures and records fund investors’ share of net assets of the joint ventures as non-controlling interests in subsidiaries. For nine months ended September 30th, 2013, $221 million was poured into the joint venture by non-controlling interests, a 248% increase as compared to a year ago.
  •  Lease Pass-Through: SCTY leases solar systems to solar energy systems to fund investors under a master lease agreement, and these investors in turn sublease the solar energy systems to customers. Cash upfront payments will be received by SCTY from its fund investors. There was an 49% increase in Solar energy systems, leased and to be leased – net account, which implies more reliance on this structure.
  • Sales-Leaseback: SCTY generates cash through the sale of solar energy systems to its fund investors, and it then leases these systems back from the investors and subleases them to SCTY customers. Since more than 50% of revenue was contributed by operating leases rather than solar energy system sales, the liability account and cash flow related to this structure have not seen much movement for the quarter ended September 30th, 2013. Besides, the investment tax credits, accelerated depreciation and other incentives would be transferred to SCTY’s fund investors without taking effect in SCTY, different from what Lease Pass-Through structure would accomplish.

So the asset monetization strategy plays nicely into the financing and the business model of SCTY, which integrates the sales, engineering, installation, monitoring, maintenance and financing of its distributed solar energy systems. Customers of SCTY can have choices to purchase leases and power purchase agreements due to SCTY’s ability to finance the installation of the solar energy systems by monetizing the resulting customer receivables and related investment tax credits, accelerated tax depreciation and other incentives. According to its Form 10-Q, SCTY expects customers to continue to favor leases and power purchase agreements.

On mergers and acquisitions side, SCTY has acquired one of its channel partners In September 2013, Paramount Energy Solutions. Of total purchase consideration, only $3 million in cash was paid and $108 million was paid in SCTY’s common stock. In October 2013, SCTY has also entered into an agreement to acquire all of the outstanding capital stock of Zep Solar, Inc., or Zep Solar, for shares of the Company’s common stock valued at approximately $158 million. These two acquisitions should help SCTY bring down some burden levied by its cost structure. However, it remains unclear on the degree that these two acquisitions can generate.

Even with so much happening on SCTY’s operational and financing side, its stock price still floats at 26 for the price/sales multiple and at 12 for the price/book multiple. Investors should pay closer attention in the upcoming growth of revenue, growth of cost structure, and price multiples before investing in this stock. 

 

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TWITTER: IPO is on the Horizon – Part 2

Twitter, Inc. (TWTR) is set to have its first day of trading on Nov. 7th, 2013. With all the wait, buzz, anticipation and even speculation on one of the hottest IPO’s of the year, how would investors prepare themselves for this sizzling stock?

Several market participants, analysts, investors, or even entrepreneurs have offered their views on how to proceed in terms of investing in Twitter, Inc.

The well-known host of CNBC’s Mad Money, Jim Cramer, said that individual investors should be aware of the order-pushing technique from the stockbrokers and sales persons, since they are pressured by institutional investors to unload shares for them and hefty margins may be built into shares that are about to change hands into retail investors, according to this Yahoo article.

Mr. Cramer suggested that retail investors should think twice before paying for Twitter’s stock for more than $28 per share, which would give Twitter a market value of $15 billion.

Another market participant, Vivek Wadhwa, also a tech entrepreneur, academic, and writer thinks that the valuation of Twitter has been over-inflated due to the build-up from the insiders rounds of financing and the subsequent demand of return on investments, according to this Yahoo article. He also mentioned that Twitter’s business model might not be sustainable, given that it is operating in a crowded space with its chinese counterpart Wechat and japanese counterpart Line.

We have seen Twitter’s financial statement from its Form S-1, from our previous post: TWITTER: IPO is on the Horizon – Part 1, which shows that it has not turned profit. This is not a news to a lot of people. However, we noticed in the updated Form S-1, Twitter has shown an increasing trend of stock-based compensation in the nine months ended September 30th, 2013, as compared to a year ago. This factor would probably continue to weight down Twitter’s earning performance in the immediate quarters, which would pressure its stock price.

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According to Twitter’s Updated Form S-1, its cash flow statement shows that depreciation and amortization are on the rise as well. For the nine months ended September 30th, 2013 alone, Twitter, Inc. has $77.67 million in depreciation and amortization expenses, which surpassed the yearly amount of depreciation and amortization expenses, i.e. $72.50 million,  in year 2012. This is partly due to the acquisition spree that Twitter, Inc. was on. This factor may weight down the earning performance in the upcoming quarters as well.

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Moreover, Twitter has estimated that $24 per share, the midpoint range of the estimated offering price range set forth on the cover page of its prospectus, will bring in approximately $1.62 billion from the sale of shares in the offering. However, with more cash sitting in Twitter’s bank account, investors may start to pay more attention on how it uses this amount of cash, given that many activist investors recently publicly expressed their views on better usage of corporate cash, i.e. hedge fund manager David Einhorn’s bid to block Apple Proxy Vote, as reported by WSJ.

Lastly, Twitter has disclosed its valuation on various dates in 2013. The lower range of its per share value is at around $17 dollars. Combined with its $24 per share initial offering price point, there is a built-in 41.17% increase in this initial price point. So buyers beware!

 

YELP: To Grow Revenue or To Grow Cash?

YELP, Inc. (YELP) released its financial results for the quarter ended September 30th, 2013 on Oct. 29th, 2013. The online local business reviews site, for the most recent quarter ended September 30th, 2013, has revenue of $61.18 million, a 68.21% increase as compared to the same period a year ago. In terms of the bottom line, Yelp still operated in the red-ink territory with $2.3 million in net loss for the most recent quarter. On Oct. 29th, 2013, Yelp announced that it will issue a follow-on offering to sell around $250 million of Yelp’s Class A common stock, par value $0.000001 per share, according to its prospectus filed. Several companies have issued follow-on offerings so far this year, due to recent strong stock rally, including Linkedin and Telsa.

So let’s take a look at Yelp’s financial statements briefly before discussing further on the follow-on offering.

First of all, Yelp’s income statement shows a steady cost structure. With the largest expense item tied with sales and marketing, i.e. more than 55% of total revenue, it would be interesting to see how much revenue can be generated per unit of sales and marketing effort. For the quarter ended September 30th, 2013, YELP had generated $1.79 revenue dollar per unit of sales and marketing effort, only 5% increase from $1.70 revenue dollar per unit of sales and marketing effort in the same period a year ago. Historically speaking, YELP had generated $1.49 revenue dollar per unit of sales and marking efforts in the quarter ended September 30th, 2011, which jumped 14.05% to $1.70 same period in a year later. In retrospect, YELP had had growth rate of revenue in the range between 63% and 69% of total revenue since 2011, nevertheless, the growth rate of its cost structure had fluctuated between 49% and 64% of total revenue on the quarterly basis. For the quarter ended September 30th, 2013, we see the growth rate of total cost closely followed that of revenue, i.e. 64.29% of total revenue, which in turn would squeeze the room of profitability. However, for the nine months ended September 30th, 2013, we see that growth rate of total cost was not trailing as closely behind that of revenue as what we see on the quarterly basis.

On the balance sheet side, Yelp’s cash position stayed at roughly 45% to 50% of total assets. The second largest item on its balance sheet is goodwill, with more than 25% of total assets. On the liability side, Yelp only has less than 13% of total assets in liability.

If we take a closer look at the cash flow statement, we can see that depreciation and amortization has grown 65.15% from $4.8 million to $7.9 million for the nine months ended September 30th, 2013. Also, stock-base compensation has grown 53.93% from $11.6 million to $17.8 million. These two expense items might have affected the profitability in the quarter. In terms of cash management, YELP hold most of its cash at hand without any short-term investments. This would raise a question – with the follow-on offering amount $250 million, what would YELP do with all these funds?

Based on YELP’s closing stock price $67.05 and market value at $4.37 billion on Oct. 30th, 2013, the proposed follow-on offering $250 million would consist of 5.7% of total market value as of Oct. 30th, 2013. Compared to a recent follow-on offering closed in September by Linkedin, the online professional network raised $1.379 billion based on its-then-market-value of $26 billion, which would give out the percentage of the follow-on offering as 5.3% of total market value. Therefore, in terms of the percentage of the following-on offering in total market value, YELP needs to find a good use of these cash and generates returns on its cash position. Perhaps, management of YELP has already been pondering various treasury/corporate debts investments once they obtain new funding of $250 million.

However, according to YELP’s prospectus supplement filed on Oct. 31st, 2013, YELP planned to 3.75 million shares of Class A common stock, excluding 0.5625 million shares of Class A common stock that may be purchased by the underwriters pursuant to their option to purchase additional shares of Class A Common Stock. The total outstanding of Class A common stock after this offering will be 57,323,297 shares (57,885,797 shares if the underwriters’ option to purchase additional shares is exercised in full). New 3.75 million shares of Class A common stock only consist of 6.5% of total Class A common stock after this offering, without considering the underwriters’ option to purchase additional Class A common stock. YELP has Class B common stock outstanding after this offering 12.4 million shares, which are entitled to 10 votes per share, on all matters that are subject to a stockholder vote, as compared to a single vote entitled to holders of Class A common stock.

Lastly, on the macroeconomic level, Fed has remained its pace of bond purchases until the outlook for labor market improved substantially, according to this Bloomberg article and FOMC’s own press release. This probably would not trigger any disturbance or sell-off in the market yet due to a delayed consequence of tightening Fed’s bond purchasing program and monetary policy. However, most participants in the market agree that the tapering action will come unavoidably and eventually, the more important question is when the tapering action will come. This factor should be considered when investing in these follow-on offerings.

YELP FORM 10 Q PL

YELP FORM 10 Q BS

YELP QUARTERLY FORM 10 Q CASH

YELP VARIOUS GROWTH RATES

Bottom Line: YELP debuted its IPO on March 2nd, 2012 with the price of $24.58. Since then, YELP had a good run of 172% increase in its stock price. Investors should pay attention on the sustainability of this momentum and growth rates.

NFLX: Welcome, New Members!

Netflix, Inc. had filed its latest Form 8-K on Oct. 21th, 2013. Currently, according to the same Form 8-K, Netflix has over 40 million members, up from less than 30 million one year ago. The detailed breakdown is listed in the following table. As we can see in this table, most increases in paid members came from year-to-year basis (YoY basis), not so much from quarter-to-quarter basis (QoQ basis). The third quarter of 2013 has 25.76% and 118.97% increase in membership, on the YoY basis, domestically and internationally, respectively. As previously mentioned in our post: NFLX: ANY MORE GROWTH AHEAD?, the first quarter result in 2013, on the year-to-year basis, exhibited 26.75% increase, as compared to the first quarter in 2012. International membership has also contributed more than 160% increase in the first quarter of 2013, on the YoY basis. However, the rate of increase in domestic membership, on the quarter-to-quarter basis, for the most recent quarter was not in double-digit, which suggests that investors need to pay attention to this trend.

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As for Netflix’s income statement, the most recent quarter ended September 30, 2013 had revenues of $1.105 billion, a 3.43% increase from the one ended June 30, 2013. Cost of revenue, for the third quarter 2013, has also grown to $791 million, a 4.98% increase from three months ago. Since NFLX is one of the best performing stocks in 2013, it would be expected to see that NFLX’s growth rate of revenue exceeds that of cost of revenue. However, this is not the case for NFLX in its third quarter result. Moreover, if we take a look at the revenue contribution per paid member in the third quarter, excluding DVD subscribing members, we would have $29.10 for the third quarter in 2013, as compared to $32.92 for the second quarter in 2013. There is a slight decline in the revenue contribution as well.

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On its operating cash flow, NFLX has put emphasis on additions to streaming contents, increasing streaming content liabilities and amortization of streaming content library. This coincides with NFLX’s strategy of launching its own TV series and expanding its library aggressively. In our previous post: NFLX: ANY MORE GROWTH AHEAD?, we had discussed that the ratio of additions to streaming content library and amortization of streaming content library has dwindled from 2.25 in 1Q, 2012 to 1.16 in 2Q, 2013. The downward trend shows that per every unit in amortizing content library, the speed of adding one more unit of content library has been slowing down, until in 3Q, 2013, we see a jump in this ratio to 1.59, which implies that the speed of adding one more unit of content library has picked up on the per every unit in amortizing content library.

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NFLX CEO Reed Hastings has written to its investors that he set his sights on HBO’s global subscriber count, according to this Bloomberg article. Right now, HBO has 114 million subscribers worldwide, while Netflix, Inc. has 40 million, with more than 29 million members in U.S. alone. NFLX’s goal to surpass HBO might seem a bit far outreach for its current state, however, NFLX has kept, and will continue to keep, its focus on developing original TV series that might attract more members in the immediate future. Even though this move would put more uncertainty into its stock price, since the success of a TV series is not a guarantee.

As for NFLX’s capital structure, it has been similar to that as of June 30, 2013, no major changes in the third quarter of 2013.

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Bottom Line: NFLX has been one of the best performing stocks in 2013. However, due to slight decline in the rate of adding new members both domestically and internationally, investors should pay more attention on its membership base in the immediate quarters.

TWITTER: IPO is on the Horizon – Part 1

Twitter, Inc., one of the pioneer social networking sites, had filed its long-anticipated Form S-1 on October, 3rd, 2013. Many market participants, analysts and observers had immediately noticed that the 140-character texting platform still not yet turned profit for the second quarter. However, there are still so many details to be absorbed before one even considers investing in one of the hottest IPO’s for the year.

Let’s dig in Twitter’s financials statements briefly before going further.

TWITTER FORM S- 1 PL ENDED JUNE 30, 2013

First, for the six months ended June 30, 2013, Twitter has revenue of $253.63 million, a 107.29% increase compared to a year ago. On the annual basis, Twitter, Inc. has 276% and 198% increase, in 2011 and 2012, respectively. On the profitability front, Twitter, Inc has net loss at $69.25 million for the six months ended June 30, 2013, a 41.03% increase as compared to a year ago. Net loss, on the annual basis, however, was decreasing at 38.12% in 2012 while growing at 90.57% in 2011. So in terms of short-term profitability, it is still foreseeable that net loss will continue to fluctuate up and down, not consistently improved. One of the major expense items is stock-based compensation, embedded in research and development and GA&E accounts. As Twitter, Inc. has disclosed in its Form S-1, as of June 30, 2013, it has increased its headcount to approximately 2,000 employees, which is nine-fold larger than what it had in 2009.

Since 2011, Twitter had ramped up its efforts in recruiting, retaining and attracting talents in order to grow its business to a next stage. As seen in the growing number of its headcount and it weights on the cost structure, we can also see that stock-based compensation would be carried on its cost for the upcoming years. According to Twitter, Inc.’s Form S-1, if the IPO offering had been completed on June 30, 2013, it would have to record $329.60 million of cumulative stock-based compensation expense related to the Pre-2013 RSUs and an additional $234.20 million of unrecognized stock-based compensation expense related to the Pre-2013 RSUs, net of estimated forfeitures, would have been recognized over a weighted-average period of approximately three years. Also, unrecognized stock-based compensation expense of approximately $296.7 million related to other outstanding equity awards would have been recognized over a weighted-average period of approximately four years. After June 30, 2013, Twitter, Inc. had continued to make grants of equity awards of $452.9 million, after giving effect to estimated forfeitures, which is expected to be recognized over a weighted-average period of approximately four years.

On the merger and acquisition side, Twitter has been aggressively picking up startups that will compliment, augment, and expand its business to a larger scale. Since 2011, Twitter, Inc. has gradually used its stock to purchase companies instead of cash. For example, according to Twitter, Inc.’s cash flow statement, it spent $18.9 million and $1.5 million in cash, net of cash acquired, in 2011 and 2012 to purchase companies. However, the total purchase prices paid by Twitter, Inc. to acquire companies in 2011 and 2012 were roughly $38 million and $53 million, respectively. In 2013, Twitter, Inc. had spent around $105 million in total purchase prices to acquire two companies, more than 90% of which was in Twitter, Inc.’s stock.

On October 15, 2013, Twitter has also disclosed its third quarter of financial performance, according to this Bloomberg article. Twitter, Inc.’s revenue in the third quarter was $168.6 million even while net loss stayed at $64.6 million for the quarter.

TWITTER FORM S- 1 CASH ENDED JUNE 30, 2013

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Bottom Line: Twitter, Inc. has prepared to list its stock soon. However, investors should pay more attention on its profitability for upcoming quarters and potential selling pressure from existing shareholders.

ZULILY: E-commerce 2.0 for Moms and Babies, Part I

The flash sale industry was born out of the aftermath of 2008-2009 financial crisis. The so-called limited-time heavy-discounted business model had been capturing attention of many. Gilt Groupe, Rue La La, One Kings Lane, etc are all in this industry selling different products to various customers. Zulily, is also one of the disrupt e-commerce platforms that specialize in selling goods to mothers and their babies.

It was founded in 2009, and has been growing rapidly. On Oct. 8, 2013, it has filed with SEC its Form S-1 in preparation to file IPO soon. From there, we can take a look at its financial statement briefly and see how it has been performing in operation.

First of all, we can see that Zulily just recently turned profit, landing at 0.88% of the total net revenue for the most recent quarter. In flash sales industry, the percentage used to split profit margin with vendors directly determines the trickle-down effect on net profit of a flash sale company. As we can see that the gross profit margin hangers around 28% to 30% for the past several quarters, it implies that for the immediate upcoming quarters, Zulily probably would have the same percentage of net revenue in gross profit. Therefore, when gross profit is somehow predictable, then the next important indicator is the growth of net revenue for participants in this industry. Historically speaking, the growth rate of net revenue for Zulily was 114.20% for six months ended June 30, 2013 compared to same period a year ago, while on the annual basis, the growth rate of net revenue for Zulily was 132.38% and 675.71% for 2012 and 2011, respectively. Zulily had an impressive year in 2011 with growth rate exceeding sixfold as compared to 2010 and it remains to be seen that the growth momentum can be continued into 2013 and later. On the cost side, the growth rate of cost of goods sold (COGS) was 109.86% for the six months ended June 30, 2013, as compared to same period a year ago. If put on the annual basis, the growth rate of COGS was 129.59% and 734.65% for 2012 and 2011. Meanwhile, total operating expenses followed this similar pattern, with 125.27%, 105.2% and 309.13%, for six months ended June 30, 2013, twelve months ended December 30, 2012 and twelve months ended January 1, 2012, respectively.

Zulily Form S-1 PL

On the balance sheet, we can see that Zulily has very focused on its current assets, which consistently occupied more than 86% of total assets for the last 2 years. Zulily has not poured money into M&A yet, as no goodwill or intangible assets account exists on its balance sheet. In terms of debt, regardless of short-term and long-term, Zulily has managed that the debt, in the percentage of total assets, has dwindled from nearly 50% to 43%. This is another indicator to watch out for when Zulily officially files its first Form 10-Q/10-K, the debt-to-equity should be low combined with the incoming funding raised in the public market. This would broaden the financing options for Zulily in next few years, as their debt level is relatively small and better-capitalized, provided that IPO is a success.

Zulily Form S-1 BS 1

Zulily Form S-1 BS 2

In terms of cash management, net cash generated by operation activities has been positive for the year 2011 and 2012. This is largely due to the temporarily pile-up in accounts payable to its vendors and increasing depreciation expenses in 2012. At the same time, Zulily has been raising funds from venture capitals in both 2011 and 2012. As of June 30, 2013, most of funds raised from venture capitals has been sitting in Zulily’s corporate cash account and short-term investment account.

Zulily Form S-1 CASH

Bottom Line: Zulily has been growing rapidly, due to well-accepting responses from early adopters, especially young mothers, and excellent execution on its operations. However, given the outlook of general economy and quarterly reporting constraints as a public company, Zulily’s growth might be put to test to see whether its profitability can rise higher.

COST: Strong Operation in Midst of a New Record High in Stock Price

Costco Wholesale Corporation (COST) will be releasing its Form 10-K in the early October. However, COST’s stock has already anticipated a good fiscal year 2013. Since its stock price peaked at $120.07 on August 5th, 2013, the stock has been hovering around the record high within a margin of single-digit percentage.

Most of the top ten institutional investors in COST are investment management companies that handle retirement plans, i.e. defined contribution and defined benefit plans, and trusts. Also, there are many mutual fund companies that have invested in COST. As of June 30, 2013, almost all institutional or mutual fund holders had maintained their stake in COST, which indicates that most shareholders have given their nods in the direction that COST’s stock is going.

But, how well did COST do in this past year? Let’s take a look at its latest Form 10-Q in order to have a sense of how COST has fared in aspects of operations, investment, and financing.

As we look at the COST’s quarterly P&L in the following table, we see that COST maintain a very steady gross margin at roughly 11%, excluding SGA&E. This would effectively bring operating profit margin to 2.5% – 3%, given that COST has historically held onto 9% – 10% as its SGA&E. So the cost structure is fairly stable. In terms of growth rate, net sales has grown at a rate of 7.79% for the quarter ended May 12, 2013, as compared to a quarter ago. Similarly, on the year-to-date basis, COST has growth rate in net sales, 8.49%. Nevertheless, when we put the growth rate of net sales on the annual basis, we see a picture slightly different from that depicted by the quarterly basis. For the last few years, the trend of annual growth rate in net sales has set up a relatively high point in 2011, 14.15%, declining subsequently to 11.50% in 2012. However, if we factor in the increasing numbers of stores that COST has been operating, we would see that growth rate in net sales per store is actually on the rise, from -4.34% in 2009 to 8.57% in 2012. The growth rate in merchandise costs per store exhibited a pattern that closely tracks that in net sales per store. As COST doesn’t break out its in-store and online revenue, we temporarily considered COST’s entire revenue on the per store basis.

COST FORM 10 Q PL ENDED MAY 12 2013

COST FORM 10 K GROWTH RATE OF NET SALES, NET SALES PER STORE, MERCHANDISE COSTS PER STORE

On the other hand, COST has a balance sheet that strictly focuses on current assets, land, buildings and equipments and construction in progress. There are no goodwill, intangible assets and other assets. This echoes with its core operation and how it had chosen to conduct its business. However, long-term debt has increased $3.6 billion in second quarter of fiscal year 2013, which was used to pay out dividends $3.3 billion to its shareholders. As COST has steadily grown its dividends over the years, the sustainability of one-time dividends like $3.3 billion might be put to test when there is sudden shift in economy condition, customer spending or even the speed of store-opening for COST. Total liability is at the highest level for the last five years for COST, however, COST can steadily generate cash flow internally from its operation and this view has somehow strengthened confidence in the market, i.e. establishing a record high on August 5th, 2013, even though the sustainability of one-time dividends might be put to test in the incoming quarters.

In terms of stock repurchase program, according to COST’s latest Form 10-Q, it mentioned that there was no stock repurchase activity in the third quarter of 2013. In the third quarter of 2012, COST repurchased 1,488,000 shares, at an average price of $87.41, totaling $130 million. In the first thirty-six weeks of 2013 and 2012, COST repurchased 357,000 shares and 5,369,000 shares, at an average price of $96.41 and $83.38, for a total expenditure of $34 million and $448 million, respectively. There is a contrast between the amount spent in repurchasing COST’s own stock in 2013 and 2012. COST also mention that the remaining amount available for stock repurchases under its approved plan was $3.055 billion at May 12, 2013. This point should be watched closely for COST’s investors to see how it handled the stock repurchase program, given that stock price is at a relatively high point.

COST FORM 10 Q BS ENDED MAY 12 2013

COST FORM 10 Q CASH ENDED MAY 12 2013

Bottom Line: COST has been going strong in both its operation and stock price. However, investors should consider whether the momentum in stock price would be affected or not, when general economic condition changes.

ILMN: Growing at the New Realm

Illumina Inc. (ILMN) just established a new record high on September 16th, 2013, at $85.34 per share. This price would value all 125.12 million shares outstanding at $10.67 billion and it is the second time ILMN has crossed over the threshold of $10 billion mark. Since the beginning of year 2013, ILMN has risen more than 50% with the closing price on September 16th, 2013, as compared to $55.59 on December 31, 2012, as shown in the following stock graph.

ILMN STOCK GRAPH

It is obvious to see that ILMN has several cluster buying points, i.e. daily trading volume greater than 5 million shares, during the past two years. Given that its own stock rally starting in 2012, it would be interesting to see how ILMN has fared in its operations and finance for past two years and how it has positioned itself to brace for the uncertainties looming ahead by Fed’s tapering action.

For the quarter ended June 30, 2013, ILMN has $346 million in total revenue, a 23.34% increase, as compared to a year ago. For the six months ended June 30, 2013, ILMN has $677 million in total revenue, a 22.35% increase, as compared to a year ago. However, the growth rate of total expenses, including cost of goods sold and legal contingencies, has been 20.39% and 43.71%, for the three months and six months ended June 30, 2013, respectively. Excluding legal contingencies, ILMN has growth rate of total expenses, including cost of goods sold, of 16.39% and 18.67% for the three and six months ended June 30, 2013. It is a good thing to see that ILMN has shrinking growth rate of total expenses in the midst of growing revenue for the quarter ended June 30, 2013, which shows effective cost control internally.

As for ILMN’s balance sheet, there are several movements in cash and cash equivalents, goodwill and intangible assets, net. In terms of cash management, ILMN has proceeds from sale of available-for-sale securities, $604 million for six months ended June 30, 2013 and it has also purchased available-for-sale securities, $157 million and made cash payout for acquisitions, $345 million for the first half of 2013. Historically speaking, ILMN has demonstrated a good handle in generating cash internally, both from operation and investments. As shown in ILMN’s historical selected balance sheet items, growth rate of cash was partly fueled by growth rate of revenue in 2011. On top of that, the long-term debt has grown 159% in year 2012, as ILMN prepared itself for larger scale acquisitions and more effective management of cash, led by CEO Jay T Flatley and CFO Marc Stapley, according to this WSJ article.

So far, many institutional investors have increased their own stake on ILMN. For example, JENNISON ASSOCIATES LLC has 9.1 million shares valued at $685 million as of June 30, 2013, which is 1.6 million shares more than what it used to hold as of March 31, 2013. FMR LLC also has 8.28 million shares valued at $620 million as of June 30, 2013, which is 3.5 million shares more than what it used to hold as of March 31, 2013. On the flip side, few institutional investors had recouped some gain by selling a minor portion of their holdings, for example, CAPITAL RESEARCH GLOBAL INVESTORS has sold off 2.6 million shares, i.e. 17% out of their 15 million shares holdings, as of June 30, 2013.

ILMN FORM 10-Q PL ENDED 06302013

ILMN FORM 10-Q BS ENDED 06302013

ILMN FORM 10-Q CASH P 1 ENDED 06302013

ILMN FORM 10-Q CASH P 2 ENDED 06302013

ILMN Historical Selectee Balanced Sheet Items

Bottom Line: ILMN has visible growth in its operation results and recently set up a new record high. However, investors should pay more attention to the resilience of ILMN stock in considering incoming headwinds.

INTU: Steady Growth in a Better Liquidity Position

Intuit Inc.’s (INTU) stock price has set a record high, $67.99, on March 6th, 2013, since its inception as a public company 20 years ago. Even though there was a price dip between May 2013 and July 2013, shown in the following graph, the momentum of keeping up the level of INTU’s stock price has been strong, given that the closing price on September 9th, 2013 was still at $65.45, only 3.7% away from the record high. Several institutional investors had increased their holdings on INTU during the second quarter of 2013, for example, Capital Research Global Investors increased 2.945 million more shares in the quarter, Bank of New York Mellon Corporation also increased 4.40 million more shares and Generation Investment Management LLP added 4.67 million more shares for the same period.

INTU STOCK GRAPH

However, few institutional investors had gone the opposite way to sell shares, for example, Jennison Associates LLC had sold out more than 74% of its INTU holding in the second quarter, as compared to the first quarter. The timing of selling a huge portion for institutional investors is saying more volume than for individual investors, whether the move just signifies a strategy change internally or hints that general macroeconomic condition has been calling for action for these institutional investors.

Nevertheless, let us focus on INTU’s financial statements briefly before discussing further. INTU has several business segments within its umbrella, including Small Business Financial Solutions and Small Business Management Solutions, Consumer Tax, Consumer Ecosystem, Accounting Professionals, and Financial Services. According to INTU’s Form 10-Q for the quarter ended April 30, 2013, INTU has just underwent reorganization to manage all lines of business on a global basis, effective August 1, 2013. For the quarter ended July 31, 2013, INTU has $634 million in net sales, a 11.82% increase, as compared to $567 million in net sales a year ago. Since INTU has operating segments that are heavily impacted by seasonality, we also see that net sales, $4.171 billion for twelve months ended July 31, 2013, as compared to $3.808 billion for the same period a year ago, which was a 9.53% increase. Most of the growth came from Financial Management Solutions, 18 percent for the quarter and 20 percent for the year, and Employee Management Solutions, 12 percent for the quarter and 12 percent for the year, according to its Form 8-K. However, the biggest contribution of revenue came from Consumer Tax at the growth rate of 4 percent for the year. As disclosed in its Form 10-Q filed for the quarter ended April 30, 2013, we can see the revenue breakdown in INTU’s business segments and Consumer Tax contributed more than 55% of revenue and more than 80% of operating profit margin. We expect to see this trend continuing in immediate future quarters since Consumer Tax is a substantial piece of INTU’s business and it is also a core business and profit driver for it. On top of that, we also expect to see that INTU continues to derive more growth rate from business segments other than Consumer Tax, which indicates that INTU has determined to diversify more into serving aspects other than tax for its small business customers.

Aside from INTU’s operation, it has also beefed up its liquidity by both storing up cash generated from operation and cash generated from the divestitures of some business lines. INTU has engaged in stock repurchase program, it repurchased 4.8 million shares for $292 million under these programs during the nine months ended April 30, 2013 and 15.0 million shares for $793 million under these programs during the nine months ended April 30, 2012. At April 30, 2013, an additional $1.4 billion for stock repurchases through August 15, 2014 was authorized from INTU’s Board of Directors, according to INTU’s Form 10-Q filed for the quarter ended April 30, 2013. However, we didn’t see any substantial stock repurchase in the quarter ended July 31, 2013, which might signal that INTU has been bidding its time to execute stock repurchases. On the divestitures side, INTU has discontinued Intuit Financial Services for $1.025 billion in cash and this is not showing on INTU’s cash flow statement yet. Based on these information, we expect to see that INTU’s liquidity position grows in the immediate coming quarters.

INTU FORM 8-K PL 07312013 ENDED

INTU FORM 8 K BS ENDED 07312013

INTU FORM 8 K CASH ENDED 07312013

INTU FORM 10-Q 04302013 ENDED REVENUE BREAKDOWN

Bottom Line: INTU has successfully derived growth from businesses other than consumer tax area, which is highly seasonal, and has liquidity at hand. However, investors should consider the timing of investing in INTU, given that it has been hovering around its record high price.