Looking Into SolarWinds Filings

Tech firm SolarWinds Corp. ($SWI) is in the headlines lately because it seems to be the vehicle for that massive cybersecurity attack Russian interests launched against the U.S. government and lord only knows how many private businesses.

So we at Calcbench, of course, fired up the Interactive Disclosure Tool to see what we could learn about SolarWinds from its filings. Presumably we didn’t learn as much about the company as the Russians did, but there’s still plenty of interesting stuff in there.

First, if you want to read the 8-K announcing the breach itself, that was filed on Dec. 14 under the deceptively plain heading “Other Events.” There, we see that attackers inserted their malware into SolarWinds’ Orion product sometime in the spring. The company believes that roughly 18,000 customers were affected, around 6 percent of its 300,000 customers overall.

Another interesting morsel from the 8-K shows that the breach is very much material to SolarWinds’ revenue picture:

For the nine months ended September 30, 2020, total revenue from the Orion products across all customers, including those who may have had an installation of the Orion products that contained this vulnerability, was approximately $343 million, or approximately 45 percent of total revenue.

From the firm’s recent income statements, we can see that SolarWinds had been moving briskly in the right direction over the last several years. Revenue went from $422 million in 2016 to $932.5 million last year, and the company had been on pace through the first three quarters of 2020 to end this year north of $1 billion — until this breach happened, that is.

Several other points to note within the company’s most recent 10-K, which was filed last February.

First, SolarWinds disclosed that one distributor posed a customer concentration risk, which is a fairly rare disclosure to see. The exact statement, included in the Summary of Significant Accounting Policies, was this:

We provide credit to distributors, resellers and direct customers in the normal course of business. We generally extend credit to new customers based upon industry reputation and existing customers based upon prior payment history. For the year ended Dec. 31, 2019 a certain distributor represented 12.5 percent of our revenue.

We don’t know who that distributor is. We do know, however, that privately held Carahsoft Corp. is SolarWinds’ exclusive distributor to government customers, and Uncle Sam tends to be a mighty big customer for any business. We also know that SolarWinds did not have any customer concentration issues worth reporting in prior years.

Whatever the details may be, it’s reasonable to assume that in quarters to come SolarWinds will see some revenue disruption, plus higher costs to repair the damage of the attack — and a significant chunk of revenue could disappear with the loss of this one mystery customer. SolarWinds is in a precarious position.

Second, upon hearing “reputation disaster!” we immediately thought “goodwill impairment!” and went to see how much goodwill SolarWinds carries on the books.

The firm reported $4.12 billion in goodwill assets in Q3, roughly 75 percent of the $5.45 billion in total assets SolarWinds reported. Goodwill grew by about 10 percent in 2019, but only by about 1 percent in the first nine months of this year. We’ll be curious to see what the company has to say about potential impairment in its next annual report.

We also noted an item in SolarWinds’ disclosure of intangible assets. See Figure 1, below. Notice the second line, “customer relationships.”

Hmmm. One-third of SolarWinds’ intangible assets are tied up in customer relationships. That typically means something like a customer contract that could be sold to another company, or lists of customer names that might be sold to marketing firms, or just good relations with a customer due to sustained business and other contacts.

We don’t know exactly what’s included in the $567 million customer relationships line item here. Our question, however: could this line item also suffer some sort of impairment due to the cyber attack? For example, if customers stop taking SolarWinds’ calls, or have early-exit clauses due to a breach, could this line item decline in value?

That’s not as common as goodwill impairment, but it happens.

Anyway, that’s what we found in one spare hour of poking around SolarWinds’ financial statements. More to come in the future, we’re sure.

Firms and Income From Investments

Firms and Income From Investments Last week we had a post exploring the income numbers at Salesforce ($CRM) and the surprising factoid that for most of 2020, Salesforce’s income from strategic investments in other businesses actually exceeded income from Salesforce’s own operations.

Our curiosity was piqued: How many other non-financial firms have seen investment income account for a significant portion of net income? How often does something like this happen?

We used our Multi-Company database to search disclosures among the S&P 500, comparing net investment income to all net income for 2016-2019. Pulling the data only took a few minutes, and several conclusions stood out.

First, few large companies disclose net investment income at all. In all four years we examined, no more than 70 firms out of the whole S&P 500 reported net investment income. Most that did were financial firms of some kind — and while there’s nothing wrong with being a financial firm, their operations are quite different than other sectors so we’re disregarding those folks.

Second, some firms do indeed report some eye-popping investment income numbers, but that’s rare.

As a benchmark, Salesforce’s net investment income accounted for 94 percent of all net income in 2019. Few other firms came close to that. No other non-financial firm came close to that level in 2019, although Entergy Corp. ($ETR) reported $547 million in investment income, equal to 44 percent of net income. CVS Health ($CVS) reported $1.01 billion in investment income that year, 15 percent of all net income. Most other firms were in the single-digit percentages, if they reported any investment income at all.

Third, trends are rare. Yes, Salesforce reported gobs of net investment income in 2019 — but it didn’t report numbers anywhere near those levels in prior years. Its net investment income accounted for only 5 percent of net income in 2018, and 10 percent in 2017.

The only non-financial firm that had appreciable amounts of investment income across several years was Constellation Brands ($STZ): 21 percent of all net income in 2017 and 61 percent in 2018. Then again, Constellation also reported a $2.67 billion net investment loss in 2019, which almost obliterated total income last year (a measly $21.4 million).

And where do all these net investment income numbers come from, exactly? If you want to know, you can always use the Calcbench Trace feature: click on that number when you see it in the income statement, and we’ll promptly whisk you away to the firm’s footnote disclosure to see the details.

Here, for example, is what you see when you trace that $2.67 billion loss Constellation Brands reported.

Bottoms up!

As Coronavirus Lingers, a Cash Grab

You might remember that several weeks ago we had a post reviewing the Q3 financial disclosures of nearly 2,500 firms, and one finding was that firms have stockpiled huge amounts of cash to help them weather difficult economic circumstances.

We’ve now taken a deeper look at which firms have been stockpiling the most cash, and how that picture has evolved from one quarter to the next.

Figure 1, below, tells the tale. We examined the cash holdings of roughly 400 non-financial firms in the S&P 500, and tracked total cash reported for that group from the start of 2018 through third-quarter 2020.

The blue bar is total cash for all firms. As you can see, cash was $949.73 billion at the start of 2018, trended downward through much of that year, and then trended back up to $955.7 billion by the end of 2019.

Then comes the pandemic in Q1 2020, and cash holdings soared. They hit a high-water mark of $1.323 trillion over the summer — an increase 38.5 percent in just six months. Total cash edged downward in the third quarter of this year, but not by much. Firms are still sitting on a mountain of money in case economic conditions take a turn for the worse.

OK, that all makes sense so far. Now let’s turn to the orange bar in Figure 1.

The orange bar represents cash among the 10 firms with the most cash in that specific quarter. That bar has fluctuated much less than for all 400-ish firms in total.

You might need to squint to see it, but cash among the Top 10 firms went from a low of $193.3 billion in early 2019, to a pandemic-fueled high of $271.4 billion at the start of this year — and then back to $240 billion in the third quarter. Which is actually lower than Top 10 cash at the start of 2018, when cash for this group was $270.3 billion.

We also wanted to know: How much cash did the Top 10 firms have as a percentage of all cash for the whole 400-firm sample. The results are in Figure 2, below.

As you can see, since the pandemic started, the share of cash going to the Top 10 firms every quarter is declining relative to the whole group. Given what we saw in Figure 1— that the whole group has amassed a huge pile of cash — then Figure 2 has to mean that a small group of large firms (the Top 10) are keeping cash levels roughly constant; but the other 390-ish firms are stockpiling much more.

Why? Presumably because those large firms are confident enough in their operations that they’re not too worried about cash supply — but the vast majority of other firms aren’t as confident, so they’ve salted away a mountain of greenbacks.

We should note that the Top 10 cash-rich firms does vary from one quarter to the next, so it’s not correct to say that only 10 firms qualify as success stories during this pandemic. On the other hand, a select few do keep turning up quarter after quarter: Apple, Amazon, and Google, for example; and a few others. (Mostly tech firms, of course.)

Upon Further Review…

Another way to study this trend would be to look at operating income. We already know from our first study a few weeks ago that operating income in Q3 2020 was lower than the year-ago period. So one possible analysis would be to examine total operating income for the whole group over the last three years (that is, repeat Figure 1, but with operating income rather than cash) and then compare the operating income share for the Top 10 relative to the whole (that is, repeat Figure 2).

If we see a pattern where the largest firms are increasing their share of operating income relative to the whole, then that could explain the cash patterns we see here: other firms are generating less operating income, so they’re amassing cash to preserve their liquidity.

Hmmm. That sounds like a really interesting analysis, now that we think about it. Why don’t you all circle back to us in another few days and see what we found?

P.S. For those interested in getting an Excel file, here it is. Note: You will need the Calcbench Excel Add-In installed in order to populate the data - enjoy!

Calcbench in Academia: An Interview with Dr. Vern Richardson

Today we have another in our occasional series of Q&A interviews with consumers of financial data, to hear about what research they do and how they use Calcbench to meet their analysis needs. Our guest is Vern Richardson of the University of Arkansas.

About Professor Vern Richardson

Dr. Vern Richardson is a distinguished professor of accounting at the University of Arkansas. He teaches Financial Statement Analysis, Introduction to Financial Accounting, and Accounting Analytics.

Dr. Richardson is also the author of Data Analytics for Accounting and Introduction to Data Analytics for Accounting, the only data analytics textbooks for accountants; and Accounting Information Systems, all published by McGraw Hill. He has published numerous research papers on data analytics and accounting.

What got you interested in data analytics for accounting?

I became very interested in how accounting is evolving with the proliferation of computers and the availability of data. I realized early on that the role of accountants would pivot from measurement of transactions to analyzing data. Now that machines are doing much of the record-keeping and there is so much data available to analyze, accountants need to focus their time on interpreting data to address accounting questions.

How did you learn about Calcbench?

I was searching for data providers that would give me access to the raw data from financial statements for my students. I was frustrated with the time it took to pull information from sources like Yahoo Finance.

It was through my interest in XBRL [eXtensible Business Reporting Language] that I learned about Calcbench.

What Calcbench tools do you use?

For me the most important thing is to download information embedded in financial statements into a usable format. I like to download a bunch of companies at the same time.

Beyond the basics, I like to show the “originally reported” feature to my students. Students are often surprised that what’s printed is not set in stone. And the “peer comparisons” tool is powerful. Calcbench makes it effortless to compare a company to itself over time, or to competitors, or against industries, and even to the economy. For visual comparisons, I also like the “common-sizing” tool.

How would you like to use Calcbench in the future?

I’d like to use Calcbench to forecast future cash flows for companies. I’m always interested in the future value of long-term debt and lease payments. In addition, it would be great if Calcbench could give me the Z-score, for example, to help predict bankruptcies. I would also like to use Calcbench to compute sentiment scores through textual analysis for the MD&A of the 10-K disclosures.

Lastly, it would be great to use Calcbench for easy access to disaggregate and decompose financials. It would be great if Calcbench can automate DuPont and Penman ratios for companies.

Salesforce: What Are They Selling?

When you think of Salesforce, you probably think of customer relationship management (CRM) software. That’s how most people use Salesforce. It’s the dominant player in that niche. Heck, the company’s ticker symbol is even $CRM.

Well, think again. Salesforce is more like a venture fund.

Salesforce has funded more than 400 entrepreneurs since 2009. It holds a stake in numerous businesses, and lists those investments on a portfolio page on the company website. Many of those investments have been handsomely profitable: Dropbox, Zoom, CloudLock, Box, just to name a few.

As a result, an increasing portion of Salesforce’s income actually comes from these investments. Figure 1, below, shows that a majority of the company’s pre-tax income stems from gains on those strategic investments (the orange line, which started exceeding operations income at the start of 2020 and then soaring in the last two quarters).

These investments also deliver a significant boost to Salesforce’s balance sheet. Figure 2, below, shows that strategic investments (the orange line) now account for almost 10 percent of total assets; marketable securities are another 10 percent. Add in goodwill, and you’re above 50 percent of total assets from those three line items alone.

One interesting detail: in its footnote disclosures, Salesforce assumes no change in the value of its strategic investments. Look at this excerpt from a Salesforce earning announcement filed on Dec. 1, 2020 (see it in its entirety on Calcbench):

“Gains on Strategic Investments, net: Upon the adoption of Accounting Standards Update 2016-01 on February 1, 2018, the company is required to record all fair value adjustments to its equity securities held within the strategic investment portfolio through the statement of operations. As it is not possible to forecast future gains and losses, the company assumes no change to the value of its strategic investment portfolio in its GAAP and non-GAAP estimates for future periods.”

So there you have it. Despite the CRM ticker, Salesforce is a lot more than CRM.

Going Up: Time Firms Need for Filings

Two years ago Calcbench published one of our most popular posts ever: a study of how much time firms took to proceed from their fiscal year-end, to filing an earnings press release, to filing their full Form 10-K report.

A lot can change in two years, so we decided to repeat that analysis with firms’ 2019 form 10-K filings. After crunching the numbers for thousands of filers large and small, one conclusion stands out: Firms are taking more time to file their disclosures.

Table 1, below, presents the change in filing times for 2017 and 2019 reports, across the major categories of filer status.

As you can see, time to file increased in just about every way possible — more time from fiscal year-end to earnings release; more time from earnings release to 10-K; more time from fiscal period to 10-K. The only exception was time elapsed from earnings release to 10-K for non-accelerated filers, which declined.

To calculate “average percent of time to 8-K” we divided the average time from fiscal year-end to the earnings release (yellow column) into average time from fiscal year-end to the 10-K (green column). The result is in the rose column along the right side of Figure 1. As you can see, that number increased over the last two years, too.

(We should note one significant change. Two years ago there was a fourth category of filer, the smaller reporting company. The Securities and Exchange Commission subsequently consolidated “SRCs” and non-accelerated filers into a single category. We noted this because the SRCs might explain why non-accelerated filers had such a large increase in filing times.)

Why are firms taking more time to file their disclosures? We can’t help but wonder whether coronavirus was one reason, given the disruption it caused to countless firms earlier this year. It’s also true that several significant accounting rules have undergone major revisions in the last several years, such as revenue recognition and leasing costs. Those revised standards have added complexity to what firms need to disclose, and figuring that out can take more time.

A Closer Look at Large Filers

We also charted the number of days from fiscal year-end (FYE) to 8-K earnings release and to 10-K filing for large filers. The result is this scatter-plot chart below, Figure 1.

All large accelerated filers must file their 10-Ks within 60 days of year-end. That timeline is measured along both axes — so any blue dot along the very top or the far right of Figure 2 is a late filing. (We estimate about three dozen in Figure 1.)

What’s interesting is that if you look back to this same chart for 2017 filings, decidedly fewer firms were beyond the 60-day deadline. See Figure 2, below, shamelessly stolen from our first post in May 2018.

In both charts, we see most firms crammed near the corner along the x-axis. That means most firms filed their earnings releases well after their FYE, and then filed their 10-K quickly after that.

But clearly only a handful of firms filed their 2017 annual reports after the 60-day mark in Figure 3, compared to the several dozen in Figure 2. Hmmmm.

Nobody can draw broad conclusions about that discrepancy just from this data. You’d need to research each firm individually using our Interactive Disclosures database, which might offer hints about disagreements with auditors or unreliable data or lord knows what else.

Still, the discrepancy is there. It also supports our first conclusion, that firms are taking longer to file earnings releases and 10-Ks. Presumably that would lead at least some firms to stumble into the late filing zone.

Food for thought as we all keep waiting for those latest filings to arrive.

Whole Lotta SPACs Out There

So there we were, sitting around the Calcbench virtual breakroom, wondering how we should finish up the rest of the year. Then the intern piped up: “Why don’t we form a SPAC? Everyone else is doing it!”

Ummm, no, we politely told the intern. But he had raised an interesting point: how many groups are launching SPACs these days?

For those not in the know, Special Purpose Acquisition Companies (SPACs) are investment vehicles that investors with lots of money can use to take firms public quickly. The SPAC is essentially a publicly traded holding company, which then uses its funds to acquire operating firms. The acquisition closes, and presto — that target’s operations are now part of the publicly traded SPAC.

SPACs use a dedicated SIC code when filing financial statements. This means Calcbench can identify all the SPACs that have been cropping up lately, and see what revenues, operating income, assets, and liabilities these folks have been reporting.

What We Found

First, a lot of SPACs have come onto the scene lately. Take a look at the numbers in Figure 1, below.

The number of SPACs filing statements with the U.S. Securities & Exchange Commission more than doubled in one year, from 80 firms in Q3 2019 to 170 in Q3 2020. Moreover, most of that surge happened in the last six months!

Then we peeked at the assets these firms have, since the value of assets is what drives a SPAC’s ability to make acquisitions. Here are some factoids to digest along with your turkey leftovers:

• Total assets for all 170 SPACs: $41.77 billion
• Average assets: $259.5 million
• Number of SPACs with more than $100 million in assets: 101
• Number of SPACs with more than $100 million in assets and that formed within the last year: 76

Of the 170 SPACs we found in Q3 2020, only 11 reported any revenue at all — and almost all of that revenue came from two firms! Infrastructure & Energy Alternatives ($IEA) reported $552.2 million, and AgroFresh Solutions ($AGFS) reported $52.8 million. No other SPAC even cracked $1 million in revenue.

Meanwhile, 157 of 170 firms reported an operating loss in the third quarter (and seven firms reported exactly zero dollars of operating income) and 165 of 170 reported negative operating cash flow.

The Bottom Line

The bottom line is that scores of SPACs have cropped up in the last six months. A fair number of them have a respectable amount of assets to pursue their acquisition dreams, but almost all of them are operating at a loss right now.

Who are these SPACs, and what do they want to do? You can use our Interactive Disclosures database to research specific firms and their filings, and some do tell a rather, um, interesting tale.

One of our favorites was Yacht Finders ($YTFD), which apparently launched in the early 2000s to act as an online database of yachts, matching buyers and sellers. By 2007 that business idea was taking on water, so the firm sailed into the SPAC business instead.

“The company’s business plan now consists of exploring potential targets for a business combination through the purchase of assets, share purchase or exchange, merger or similar type of transaction,” the firm said in its most recent quarterly report.

Well, that’s one way to keep your options open. Although as of third-quarter this year, Yacht Finders had no assets and no income.

Anyway, there are plenty of other SPACs in the sea. You can find them using the SIC code 6770, and then use our Interactive Disclosure page or our Multi-Company page to research any or all of them to your heart’s content.

Tagging MD&A? Yeah, We Got That

Close followers of the Securities & Exchange Commission may have noticed that last week the SEC adopted new rules aimed at streamlining the disclosures that firms need to include in their Management Discussion & Analysis.

One detail in the new rules caught our eye: that firms will not need to tag the data in their MD&A in a machine-readable format such as XBRL. Tagging would allow analysts to find data in the MD&A more quickly and export it to Excel or other analytical tools for whatever number crunching you want to do — but it would also impose new costs on filers to comply with that rule, and the SEC commissioners decided that firms’ compliance costs are high enough already. So no tagging of MD&A disclosures.

For Calcbench users, however, a critical question follows.

Who cares? We’ve already been tagging data in firms’ MD&A disclosures for years! You get it as part of the package, and that’s not going to change no matter what rules the SEC does or doesn’t adopt.

The technical details of how we parse and tag a firm’s MD&A disclosures aren’t important here. If you really want to know, email us at info@calcbench.com; we’d be happy to set up an appointment to geek out on the subject of structured data for hours.

Suffice to say, Calcbench subscribers can already access that level of analytical detail in the MD&A through our Interactive Disclosures page, or the standardized metrics we provide on the Multi-Company page, or the segments analysis we offer on the Segments, Rollforwards & Breakouts page. You get the idea — parsing financial data is our job, and we’re always striving to bring that data to you in ways that let you find exactly what you want, when you want it.

Looking Into Strip Clubs

We’re sticklers for keeping your mask on here at Calcbench — but it looks like everything else is coming off as usual at strip club operator RCI Hospitality Holdings, which just posted an update to earnings.

RCI ($RICK, naturally) published its guidance on Nov. 19. Let’s peep at what the business had to say.

On the perky side: October revenue from its clubs and restaurants totaled $15.3 million — the firm’s best performance since April, when all 48 locations were closed due to covid lockdowns. October sales were up 34 percent over September, and equaled 97 percent of October 2019 sales.

Moreover, all of RCI’s locations still operate under at least some occupancy restrictions. So if the business is seeing almost the same volume of revenue as it did prior to the pandemic but with fewer people allowed inside, we presume that means its establishments are generating more revenue per customer (although the guidance doesn’t specifically say that.)

OK, good news so far. Can RCI keep it up?

That’s less clear. The company warns in its guidance that our current second wave of the pandemic is leading to new occupancy restrictions and closures. For example, the firm had 47 locations open in October, but only 42 were open as of Nov. 19. (The five locations that closed were all strip clubs; the 10 sports bars RCI operates under the Bombshells brand all remain open.)

If there are no additional closings or restrictions, RCI estimates November sales will be around $11 million to $12 million.

For comparison purposes, revenue for the year-ago quarter was $48.4 million. That averages to $16.1 million per month, or $32.2 million for two months. This quarter, RCI is looking at $27.3 million for the first two months of the quarter ($15.3 million in October plus $12 million in November) if nothing gets any worse. We all hope that is the case, but who knows what coronavirus may bring.

Q3 Snapshot: Cash, Debt, Turbulence All Up

Our latest quarterly snapshot of financial performance is now ready for your review, and the numbers confirm a tale most of us probably suspected already: lots of firms racking up debt so they have enough cash to weather difficult economic circumstances, and lots of other turbulence across most line items on the income statement.

We try to publish these snapshot reports every quarter, collecting and comparing financial data for a large pool of firms. For Q3 2020, we looked at the disclosures of more than 2,500 firms across dozens of industries. Large retailers are excluded because most of them don’t have third quarters that end on Sept. 30; and large financial firms are excluded because that sector’s financial statements are so different from everyone else.

Still, 2,500 firms across dozens of other industries gives us a good look at what happened in Q3 2020, and how that performance compared to Q3 2019. Some of our findings, for all firms as a whole:

• Revenue down 4.25 percent
• Net Income down 16.7 percent
• Operations cashflow down 7.1 percent
• Capex down 14 percent
• Cash up 38 percent
• Total debt up 9.5 percent

Figure 1, below, shows year-over-year changes visually:

None of that should surprise people. Since the pandemic arrived earlier this year, operating expenses have gone up for many firms, while revenue declined. Firms also scrambled for cash to keep themselves liquid, and primarily did so by tapping lines of credit or raising debt. The big pieces of this puzzle all fit together.

And Looking by Industry…

Calcbench also tracked the 2,500 firms in our sample by SIC code, the classification system used to group firms by industry. So our Q3 snapshot report also lets people see how 20 specific industries fared across eight major financial metrics. For example…

• The oil & gas and hospitality sectors suffered biggest the revenue declines, as well as sharp declines in SG&A spending;
• All sectors had more cash on hand in Q3 2020 except broadcasting & communications, which had a 38 percent decline;
• Oil services saw its operating expenses plunge, while the pharma sector saw them rise sharply; all other sectors fluctuated at +/- 10 percent.

Here’s how revenue changed year-over-year for all 20 industry sectors we tracked:

You can download the full report (or our other prior reports) for free from our Research Page. Remember, if you have other ideas of research we should do or projects where you can’t quite find that piece of financial data you’re looking for — drop us a line at us@calcbench.com. We’re here to help!