Principles of Finance: Unit 8, Operational Metrical Analysis

Operational metrical analysis…à la Shmoop.

CoursesFinance Concepts
Principles of Finance
FinanceFinancial Responsibility
Personal Finance
Finance and EconomicsPrinciples of Finance
LanguageEnglish Language
Life SkillsPersonal Finance
SubjectsFinance and Economics

Transcript

00:23

huge part of its story to the street The fact

00:26

that company made its own at scale better and cheaper

00:29

batteries than the competition Well that was a big part

00:32

of the reason it won the early battles of drone

00:35

wars in a galaxy new nearby So you go through

00:38

this thing line by line again with an expense focus

00:41

Well it's really Just a bunch of random observations here

00:43

The spreadsheets Almost all you know about the company at

00:46

this moment in time and a few powerful trends or

00:48

sticking out yet First the battery's charger systems are going

00:52

down in cost on pretty steadily for the first few

00:54

years here It looks like they've flattened out at thirty

00:57

bucks ish in the last three years Well why have

01:00

they flatten a thirty boxes at a scale issue Like

01:03

if they produce ten million batteries a year I'ii sold

01:06

them to everyone else all their competitors as well And

01:09

every other drone maker maybe even beyond drones with their

01:11

costs then go down to twenty bucks or fifteen or

01:15

have they hit their maximum cheapest price They can make

01:17

it scale here You know to ask that question to

01:20

company management if you're ever able to get a real

01:22

meeting Well the form factor plastics costs have continued to

01:25

decline steadily You wonder about the aftermarket market that is

01:29

Is there a business selling broken blade replacements at a

01:33

three bucks each They can't cost more than a nickel

01:35

each to make its scale And then there's Another weird

01:38

thing you wrestle with here The company really makes two

01:40

products This model breaks out the revenues separately but not

01:44

the costs Why is there maybe just one factory that

01:47

does everything now and then the parts get parcelled out

01:50

The more you think about it that's got to be

01:52

how it's done And it would explain the very high

01:54

depreciation and amortization cost being run through the income statement

01:58

you can't point to otherwise well they probably built a

02:00

big factory to do this when times were good And

02:02

now it's weld appreciation time The plastics thing is an

02:05

interesting nugget here and that the unit costs went from

02:09

fifty two bucks plus danto about forty bucks a year

02:11

in five years That's Twelve dollars more of margin per

02:15

unit for a pretty small element here You wonder how

02:18

much cheaper the plastics part could even get Then there's

02:20

the camera costs Yeah These have clearly followed the computer

02:23

technology cost curve with massive declines in costs Going from

02:27

about sixty bucks a unit in two thousand eighteen Toe

02:30

thirty eight bucks just five years later Well you wonder

02:32

if the trend will continue And you remember your grandfather's

02:35

speech about the four hundred ninety nine dollars he look

02:37

packard calculated that today is a one dollars throw in

02:40

at the airport checkout stand It literally cost less than

02:43

the big twix bar packet next to it Well video

02:46

cameras go the same route You wonder Well the guidance

02:49

system numbers must be lie things that is the cost

02:52

Go from one hundred nine dollars teo Ninety two dollars

02:55

each Nice steady but slow unit cost declines But you

02:59

know that the complexity of guidance systems grew geometrically with

03:03

massive government regulation all around the world Everything today Has

03:06

to be licensed and is carefully regulated in the owners

03:09

in order to get to fly The drones have toe

03:11

personally authenticated identify themselves biometrically on the machines or they

03:15

won't fly but the circuit isn't completed with the faa

03:18

and the thumbprints and eyeball retina and all that stuff

03:21

don't match Well then that day is a no fly

03:24

day You know to yourself that this technology and all

03:26

the loitering behind it couldn't have been chief so the

03:29

fact that the costs went down at all is actually

03:32

surprising to the upside You're guessing that the cost of

03:35

the hardware and software licenses cratered while other costs like

03:38

adding in biometrics made the declines much slower If that's

03:42

the case well then in the next few years from

03:44

here cost should come down fast on the new guidance

03:47

system with no more upgrades needed Okay so now you

03:50

move down past the per unit expenses lines there into

03:53

the overall and a bunch of rough numbers map into

03:56

your head to the four hundred twenty five million ish

03:59

revenue figure you're averaging out from the recent last few

04:02

years of operations Well the quick summary who cares About

04:05

batteries form factors cameras in packaging shipping all of them

04:09

together are barely over ten million dollars in expenses overall

04:13

even if you could reduce them a whopping forty percent

04:16

Well they don't really move the bottom or top line

04:18

much though this just simplified a whole lot of your

04:21

early due diligence on the company You can pretty much

04:24

ignore these line items for your initial walk through especially

04:27

with management guidance systems Yeah they matter more but interesting

04:31

The overall cost there is flat You're guessing that the

04:34

company had a migration away from the bigger more expensive

04:36

drones but the smaller ones in the later years and

04:39

the guidance system basically was the same Whether the drone

04:42

itself was big or small with a big cost here

04:44

Yeah labor it's magically flat at this weird eighty nine

04:48

million dollars ish number It's amazing how they came out

04:52

to the exact same amount of labour costs year after

04:56

year to the dollar even go figure Same deal with

04:59

packaging and shipping What are the odds anyway Labor is

05:03

a biggie here You wonder why it didn't scale meaning

05:05

get cheaper with volume in time and size that is

05:08

you think that a robot e company would take advantage

05:11

of robots in assembling these things Why wouldn't the assembly

05:15

labor costs go down and you think about it qualitatively

05:18

in that labour is about a fourth or fifth of

05:20

the total expenses behind these drones that seems really high

05:24

in the scheme of things you wonder if there's some

05:26

wizard like value add you could bring in here knew

05:29

a stem the cost of labor and you're wondering about

05:32

unions and you've got to ask about those contracts and

05:34

what's going on there The whole notion of value add

05:37

here for you coming into this company is a big

05:39

with any of the really expensive private money management firms

05:43

The cell to the investors putting money into the private

05:46

equity funds is that management are knuckleheads and that the

05:49

real genius kids from stanford's engineering and computer science departments

05:54

will know better how to make the rubber hits the

05:56

road or the blades that the oxygen molecules as it

05:59

were Yeah it works Lots of two percent fees get

06:02

paid on the backs of stanford phds Anyway if you

06:05

look at the total expenses line it hovers like a

06:08

drone strikingly flat in the mid to high one seventy

06:11

zone even though pretty volatile revenue moves here here is

06:14

there just a basic fixed recurring cost to this company

06:18

that their wedded to in the kink it away from

06:20

like a minimum amount of inventory that just has to

06:22

be ordered for the trains to keep on training Ordinarily

06:27

it wouldn't make any sense in a company like this

06:29

there are in fact marginal expenses to building this product

06:33

The opposite would be like a cloud management company who

06:36

has almost no marginal expense other than electricity to run

06:39

it's you know huge clouds of servers We'll gross margin

06:42

here at the drone company moved all over the place

06:44

very much a tail wagged by the revenue dog from

06:47

forty eight percent in two thousand eighteen almost sixty percent

06:50

in the later years when the company really started to

06:52

struggle Well then something seems really off If things were

06:56

going badly wouldn't you expect gross margin to decline Why

07:00

would it go up Makes no sense All right well

07:02

maybe things will start to click more here after her

07:05

fourteenth cup coffee you