It’s possible that Equifax is pulling on accounting levers to juice its earnings and the Adjusted EBITDA that it reports. Capitalizing expenses (e.g. software development costs) creates profits now and losses later- it changes the timing of when expenses are recognized.
- On the balance sheets, capitalized internal-use software grew from 212.5M to 307.0M (an increase of 44% per year, or 94.5M). This area of accounting is subjective- should software development costs be amortized over 3 years, 10 years, or somewhere in between? What expenses should be considered capex? Should these expenses even be capitalized?- some software companies don’t capitalize software development costs at all. The answers are not clearcut. However, accounting distortions can occur if a company were to suddenly aggressively capitalize expenses that it previously expensed.
- While capitalized internal-use software grew 94.5M, consolidated income before income taxes grew 91.6M in the same timeframe. So it’s possible that Equifax’s growth is not as fast as it seems.
Flying cars as depicted in this cartoon series from the 60s.
Predicting the future is hard. Yet many people talk about self-driving cars as if they will become reality in a few years. Unfortunately, the current reality is that we are far away from commercialization of fully self-driving cars. Google is the closest, yet its self-driving car technology has some serious limitations:
- It requires an attentive human driver to drive safely. This largely defeats the point of a self-driving car.
- It doesn’t work if there is heavy snow or rain.
- The car only works in areas with special 3-D maps, which are currently expensive to create.
- The system can’t handle construction zones.
- Because they drive in a non-human manner, the cars get rear-ended more often than human drivers.
- There are other situations where the cars may have problems – left turns without a light and heavy traffic, potholes, pulling aside for emergency vehicles, obeying directions from a police officer, ice on the road surface, cyclists doing a track stand, etc. etc.
I find it interesting that so many people have been sucked into the idea that self-driving cars will be an imminent revolution that will disrupt our lives. Mostly, there are many people who want to believe that technology will disrupt our lives in a positive way. There is no differentiation between technologies with major technical obstacles (e.g. artificial intelligence, machine learning) and technologies with few obstacles (e.g. cloud computing, social media, smartphone apps, over-the-top video, etc.).
(This is not an actionable idea.)
From researching dollar stores, one of the things that struck me was that you can purchase a pregnancy test for a dollar. Amazon’s #1 best seller pregnancy test costs $12.33– a magnitude more expensive than dollar stores. Amazon is clearly not competing on price!!
By comparison, a more discounting-oriented online retailer like Newegg has razor-thin gross margins of between 8 to 11% (before overhead). Newegg sells computer parts online. Its financials are available via the S-1 filing on EDGAR due to Newegg’s aborted IPO.
In my opinion, investors should mostly ignore the hype around “cloud” computing.
There are different definitions of so-called “cloud” computing. In a literal sense, cloud computing refers to computers attached to a network. Such technology has been around since the 1960s. The current interest in cloud computing largely has to do with the pervasiveness of fast Internet connections. “Cloud” software can be thought of as “software that requires a fast Internet connection”. The widespread adoption of broadband Internet allows certain forms of cloud technology to become more viable. For example, backing up large amounts of data over an Internet connection now makes sense.
However, all software companies are largely on the same footing when it comes to cloud computing. If cloud computing makes sense for a particular market segment, anybody can (re-)design their applications to take advantage of fast Internet connections. Software has always been an arms race between competitors improving their product with new features. Cloud computing is simply part of that arms race. Personally, I don’t see cloud computing as being a paradigm shift like the Internet was.
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.