On LinkedIn, a Restoration Hardware employee states that their department (ocean freight operations) has a consistent annual growth of 12%. This is much lower than the company’s reported
revenue COGS growth (20%+). I would note that RH has been increasingly sourcing more and more of its product from overseas:
- (EDIT: 4/2/2015) The 2011 S-1 states: Based on total dollar volume of purchases for fiscal 2010, approximately 73% of our products were sourced in Asia, the majority of which originated from China, 16% from the United States, 8% from Europe and the remainder from other regions.
- The FY2013 10-K states: Based on total dollar volume of purchases for fiscal 2013, approximately 69% of our products were sourced in Asia, the majority of which originated from China, 26% from the United States and the remainder from other regions.
- The FY2014 10-K states: Based on total dollar volume of purchases for fiscal 2014, approximately 84% of our products were sourced in Asia, the majority of which originated from China, 10% from the United States and the remainder from other regions.
Adjusting for the lower domestic sourcing would suggest that RH’s total overall buying may have grown at less than 12% annualized.
Restoration Hardware’s financial statements paint a picture of very high growth. In the past, the financials were more or less internally consistent. Numbers with a relationship to revenues (taxes paid, contingent rent, actual sales returns, employee count) largely tracked the growth in revenue growth. What’s curious in the latest 10-K is that actual sales returns no longer track reported revenues due to an error identified for FY2013 and FY2012.
From the press release filed on EDGAR [emphasis mine]:
SHENZHEN, China, March 24, 2015 /PRNewswire/ — China Information Technology, Inc. (the “Company” or “CNIT”) (Nasdaq GS: CNIT), a leading provider of integrated cloud-based platform, exchange, and big data solutions to the Chinese new media industry, today announced that the Company has completed its acquisition of Shenzhen Biznest Internet Software Co. Ltd. (“Biznest”), a leading cloud computing hardware and software company in China. As previously announced, the total consideration of the transaction is approximately $15 million, consisting of approximately $7.5 million to be paid in cash and 1,543,455 ordinary shares to be issued by the Company. The transaction consideration has been fully paid by March 18, 2015 and the modification registration of Biznest with the competent administration for industry and commerce has also been completed.
Now I think that CNIT has figured out its identity as a hot cloud technology company. And now there is no reason for me to be confused about why Biznest’s domain name registration listed a chinacnit.com email address. (See my previous post on CNIT’s multiple personality disorder.)
*Disclosure: No position. I swing trade in and out of stocks. This may be a mistake on my part… who knows.
EDIT (3/27/2015): As of 3/27/2015. I am short CNIT. I may cover my position without updating my blog.
Avid sells its software through different pricing structures. For some products, Avid offers support contracts. Deferring revenue makes sense for those contracts. However, Avid also sells software for one-time payments. In my opinion, deferring some of the revenue from such sales creates a major accounting distortion. Avid already has the customer’s money so it does not make much sense to defer the revenues and profits on such sales.
History has a pattern of mass-market products eventually decimating low-volume high-end products. The cost savings from economies of scale overpower the benefits of specialized solutions. This has happened to word processing (e.g. Wang Labs), mainframes, high-end CPUs (SGI versus Intel), post production systems (ADSK, ADBE, AVID, etc.), film/video cameras, and many other industries.
Back in Dec 2012, I wrote a post on enterprise storage. Now, I’m starting to be more confident that enterprise storage will indeed become increasingly commoditized.
I think that proprietary ecosystems like Amazon Web Services will continue to grow. These ecosystems will be popular with small software developers because it saves a lot of time. Larger developers will see less benefit from proprietary software because their problems tend to be more specialized and difficult.
The main benefit of pooled infrastructure for larger developers is higher server utilization. Many of their workloads see fluctuating demand depending on the time of day, depending on the season, or depending on one-time events (e.g. ticketing companies will see a heavy server load when tickets for their most popular events first become available). They should see their costs drop by taking advantage of the elasticity made possible by pooled infrastructure.
One of the hot new growth areas in data centers is what I call “pooled infrastructure”. The data center is a pool of interchangeable servers that can be rented out on a moment’s notice. For example, a customer can rent out 30 servers during peak usage and 10 servers during off-peak usage. Allowing customers to share a pool of servers greatly increases hardware utilization.
Along with the push towards renting out server capacity, the infrastructure providers are bundling value-added software with their infrastructure to save time administering and setting up the infrastructure.
With traditional colocation, a data center will rent out space to many different customers. Each customer brings in their own server hardware. One of the trends among data centers is to have the data center purchase and manage all of the hardware. This creates various economies of scale and benefits such as:
- Standardization of hardware within a data center allows for elasticity and rapid provisioning of a server. This opens up a new market for customers who want to rent servers. Customers can have an operating serving within minutes or hours rather than weeks.
- Software can automate the process of setting up servers.
- Centralizing the purchasing and management of hardware reduces the inventory of spare parts that must be kept on site. It also allows for repairs to have a much faster turnaround time because clients do not need to physically go to the data center to repair their servers. These are very minor efficiencies.
- If clients do not need to actually visit their servers, certain efficiencies are possible. Vertical integration between data center design and server design allows for various capex and opex savings from power efficiency and cheaper servers.
- Some infrastructure providers offer managed IT services. They help customers to secure their servers, to maintain the server’s software, etc. etc.
In data centers, the most interesting areas currently are in:
- Software. In particular, Amazon has been a pioneer in creating value-added software that helps software companies quickly setup databases and servers and backup storage. Google, Microsoft, and IBM/SoftLayer are doing somewhat similar things. The problem is that the data center segments of these companies likely will not move the needle much.
- IT services. Rackspace in particular is doing very interesting things.
The least interesting areas are companies that are mainly involved in selling space in a building because that business is a commodity. Those companies will not make a lot of money and they will not lose a lot of money. While I think a lot of the data center REITs are overvalued and are suckering institutional investors into overpaying for their stock, they are not compelling shorts because they aren’t losing money quickly. As well, many (legitimate) data center companies have been taken over at large premiums by companies like Verizon and Cogeco Cable at valuations I would disagree with.
*Disclosure: No positions.